Aug 14, 2019: Stock markets on both sides of the Atlantic saw hefty losses Wednesday, gripped by fears for the global economy only a day after enthusiasm over possible detente in an ongoing US-China trade war had given them a dizzying lift.
A German GDP contraction in the second quarter, weak Chinese industrial output and an inversion of the US yield curve all seemed to cement fears of a global slowdown.
“The joyous reaction in the markets to the news that the US would delay increasing tariffs on some Chinese consumer products appears to have been short-lived,” said David Cheetham at XTB.
Eurozone indices were around two percent down by the mid-afternoon, while on Wall Street the Dow Jones index lost nearly 400 points at the New York opening bell.
The yield on the 10-year US Treasury bond, meanwhile, briefly slid below the yield on two-year debt Wednesday, a rare phenomenon that has often been a harbinger of recession.
– Mind the yield –
Bond yields have gyrated in recent weeks, with analysts warning that sinking rates are a sign of a worsening medium-term and near-term economic outlook.
XTB's Cheetham noted, however, that stocks were not usually in immediate trouble from bond yield inversions.
Whenever yields inverted in the past 60 years, it took US stocks at least three months, and on sometimes even 22 months, before they peaked, he said.
European and US stocks had risen across the board on Tuesday on news that the United States had delayed tariffs on a swathe of Chinese goods easing tensions in their bitter trade war, an upward trend that was mirrored by Asian stocks Wednesday.
Shanghai managed to end with a gain of 0.4 percent despite data showing Chinese factory output expanded last month at its slowest pace in 17 years.
But in European trading, Frankfurt slumped after data showed Germany's economy contracted in the second quarter, highlighting its vulnerability to trade tensions and stoking debate on higher government spending.
– Keep that scepticism –
Shrinkage of 0.1 percent meant the eurozone's largest economy lost significant momentum compared with the 0.4 percent growth seen in January-March.
Germany actually lagged Italy's standstill economy — and France which posted 0.2 percent growth.
Milan's stocks index meanwhile tumbled by more than two percent, a reflection of Italy navigating a political crisis.
“The lift (for stock markets) gained from Tuesday's trade war twist… failed to carry over to Wednesday — the mood undermined by weak data from both China and Germany,” said Connor Campbell, analyst at Spreadex trading group.
The dollar was down against main rivals, with sterling rising after official data showed UK annual inflation rose unexpectedly to 2.1 percent in July from 2.0 percent the previous month.
Tuesday's trade war development had provided some much-needed respite for investors, under intense pressure from a range of issues including protests in Hong Kong and Brexit.
Oil prices retreated having surged Tuesday on the tariffs news.
US President Donald Trump said top-level negotiators for Washington and Beijing had held “very productive” talks by phone.
Trump said the decision was made to protect consumers heading into the holiday shopping season, with 10 percent levies on electronics goods — which were due on September 1 — put off until December 15.
“Markets… rallied hard on the notion of Trump blinking, but overall a high degree of scepticism should remain and an imminent deal is unlikely given Trump has foreshadowed he is going to be campaigning hard on the issue in the 2020 election,” cautioned National Australia Bank analyst Tapas Strickland.
– Key figures around 1335 GMT –
- London – FTSE 100: DOWN 1.4 percent at 7,148.93 points
- Frankfurt – DAX 30: DOWN 2.0 percent at 11,513.21
- Paris – CAC 40: DOWN 1.9 percent at 5,262,99
- Milan – FTSE MIB: DOWN 2.2 percent at 20,093.55
- EURO STOXX 50: DOWN 1.9 percent at 3,292.41
- New York – Dow: DOWN 1.6 percent at 25,864.06
- Tokyo – Nikkei 225: UP 1.0 percent at 20,655.13 (close)
- Hong Kong – Hang Seng: UP 0.1 percent at 25,302.28 (close)
- Shanghai – Composite: UP 0.4 percent at 2,808.91 (close)
- Euro/dollar: UP at $1.1179 from $1.1172 at 2115 GMT
- Pound/dollar: UP at $1.2064 from $1.2060
- Euro/pound: UP at 92.68 pence from 92.60 pence
- Dollar/yen: DOWN at 105.94 from 106.74 yen
- Brent North Sea crude: DOWN $1.90 at $59.40 per barrel
- West Texas Intermediate: DOWN $1.89 at $55.21