World stocks sideswiped by Wall Street, US yield curve double whammy

Thursday, 6 December 2018 00:06 - - {{hitsCtrl.values.hits}}

LONDON (Reuters): World stocks tumbled to one-week lows on Wednesday as declines by long-dated US bond yields and a renewal of trade concerns stoked fears of a downturn in the world’s biggest economy, the United States.

US markets are shut to mark former President George H.W. Bush’s death, but the effect of Wall Street’s turmoil in the previous session, when New York-listed shares tumbled more than 3%, is being felt in Asia and Europe.

That pushed MSCI’s all-country index down almost half a percent.

The declines came just a day after an equity surge driven by optimism that China and the United States would sort out their trade dispute. Then President Donald Trump threatened “major tariffs” on Chinese imports if his administration failed to reach an effective trade deal with Beijing.

Trump’s comments, alongside the drop in US stocks and bond yields, took Asian shares outside Japan 1.5% lower. Shanghai markets fell 0.6%, their losses limited by Chinese officials expressing confidence that a trade deal would be clinched on time.

European markets opened lower, with a pan-European index down 1.2%. Losses were led by a 1.6% decline in bank shares, which are being pummelled by the latest declines in long-dated government bond yields.

The moves follow similar declines in US bank shares, which dropped 4.4% on Tuesday.

Global equities have been shaken by fears of a recession, fanned by the flattening US Treasury yield curve — a phenomenon in which longer-dated debt yields fall faster than their shorter-dated counterparts.

Such an inversion of two-year and 10-year yields, when 10-year bonds yield less than their two-year debt, has preceded every US recession in the past 50 years.

So far, 10-year yields are clinging to an 11-basis-point margin over the two-year, although it was the smallest one in over a decade.

The flattening of the curve gained momentum after last week’s signal by the Federal Reserve that it may be nearing an end to its three-year rate-increase cycle. It has spread to the euro zone, where the German 2-10 yield curve is at its flattest since mid-2017 at 85.70 basis points.

German 10-year yields slipped to six-month lows of 0.247%

Markets are also bracing for more news on the Brexit front. British Prime Minister Theresa May suffered embarrassing defeats on Tuesday, the start of five days of parliamentary debate over her plans to leave the European Union.

The pound touched 17-month lows of $1.2659 on Tuesday, then recovered to trade around $1.2734 on Wednesday, flat for the day.

The dollar has been undermined by the bond market moves and recession fears, but it has recovered from two-week lows against a basket of currencies to trade around 97, also flat on the day.

It rose 0.2% to 113 yen after losing 0.75% the previous day against the safe-haven Japanese currency.