Signs of a global economic slowdown roiled the markets on Wednesday as shares dived and investors fled to bonds with such intensity that short-term yields rose above longer-term ones for the first time since the crisis of a decade ago – an inversion many market-watchers saw as a strong signal of an approaching recession.
The Dow Jones plunged 800 points, or 3%, while the broader S&P 500 sank also 3% and is now more than 6% off its July peak.
Financial services were badly hit, with Goldman Sachs dropping more than 4%. Oil sank 5%, and safe havens like gold and the dollar rose.
The sharp share declines came after a rally on Tuesday that following a statement by US trade negotiators that aggressive tariffs on some Chinese-made products, including popular consumer goods, would be delayed three months to 15 December.
While an inverted bond yield curve is a classic warning sign of a recession – having preceded every economic decline in the past 60 years – some experts, including former Fed chief Janet Yellen, believe that a US recession can still be avoided.
They argue that the bond market is predicting low growth in the future, but hopefully not a full-blown downturn.
Still, the inversion between two-year and 10-year bond notes, last seen in 2007 as the American economy lurched into a recession, spooked investors.
“This is not a positive sign for the market. The Fed is totally empowered to change this dynamic and the market is saying they have to,” Credit Suisse equity strategist Jonathan Golub told Bloomberg TV.
Meanwhile, Donald Trump continued his calls for further cuts in US interest rate cuts, ramping up pressure on central bankers to make the change at their next meeting in September.
The president said on Twitter that the Fed chairman, Jerome Powell, had been “very very late” in cutting rates.
US market drops were repeated in Europe where shares lost more than 1.5% on news that the German economy contracted 0.1% in the 2nd quarter. Coupled with Chinese industrial output falling to 4.8%, its lowest level in two decades, the statistics were received as a dark signal that damage being done by the trade war between China and the US is beginning to bite.
With Germany’s Deutsche Bank predicted that the country’s economy would continue to shrink in the current quarter, meeting the definition of a recession, economists urged Berlin to sharply boost government spending quickly to prop up growth.
The German economy is also suffering from unpredictable UK efforts to leave the European Union – uncertainty that is discouraging new investment in German industry.
The latest numbers place Germany alongside the UK and Sweden as the worst-performing EU members. In the UK, London’s FTSE 100 tumbled by more than 103 points, hitting its lowest closing level since March.