Global stocks routed, oil sinks as bond markets flash recession warning

A man uses a mobile phone in front of an electronic board showing Japan's Nikkei average, Tokyo.

TOKYO (Reuters) - Global stocks crumbled and oil prices extended a punishing sell-off on Thursday as an inverted U.S. bond yield curve intensified fears about a world recession.

Markets in Asia were already on the backfoot after all three major U.S. stock indexes closed down about 3% overnight, with the blue-chip Dow .DJI posting its biggest one-day point drop since October.

The tumult in stocks was triggered by an overnight intraday fall in yields of 10-year U.S. Treasury notes US10YT=RR below the two-year yield US2YT=RR, the first such drop since 2007, in what is known as a yield curve inversion and widely seen as a sign of a looming recession.

Global growth woes have mounted in recent months, especially as a bruising trade war between the United States and China showed signs of dragging on in a blow to businesses and consumers.

The debilitating effects of the Sino-U.S. trade war on growth was on full display this week as Germany’s economy contracted in the second quarter and a raft of Chinese economic data pointed to deepening gloom in the Asian powerhouse.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.9% in early trade, while Japan’s Nikkei average .N225 tumbled 1.4% and Australian stocks sank 2.1%.

Chinese markets were also hit, with the benchmark Shanghai Composite .SSEC and the blue-chip CSI300 .CSI300 down 1.1% and 1.0%, respectively, while Hong Kong’s Hang Seng .HSI lost 0.8%.

“The yield curves are all crying timber that a recession is almost a reality and investors are tripping over themselves to get out of the way as economic recession hurts corporate earnings and stocks can drop as much as 20%,” said Chris Rupkey, chief financial economist at MUFG Union Bank.

In early Asian trade, 10-year U.S. Treasury yields dipped to their lowest in 3 years, while the 30-year yields US30YT=RR fell to as low as 1.991%, below the 2% floor for the Federal Reserve policy rate for the first time ever. A dip below 2% took the entire curve up to 30 years below official interest rates.

The U.S. stock futures ESc1 managed to steady a little in Asian trading, erasing earlier losses.

Kerry Craig, a global markets strategist at J.P. Morgan Asset Management, said investors should also take note of how significantly markets had changed in the last decade, which meant a yield curve inversion might not be the harbinger it once was.

“Yield curve inversion is flashing a warning sign – investors should check their portfolios are resilient. But it’s not a reason to panic or to lean into the sell-off,” he said in a note.

Still, oil prices fell on Thursday to extend steep overnight losses as U.S. crude inventories unexpectedly rose, fears of recession mounted and economic data out of China and Europe disappointed. Yet gold prices remained stable on Thursday after rising on safe-haven buying in the previous trading session.

Brent crude was down 0.8%, at $59.03 a barrel, after falling 3% in the last session, while U.S. crude fell 0.5% to $54.96 a barrel, having dropped 3.3% in the previous session.

As bond markets flashed concern about recession on Wednesday and major stock indices cratered, U.S. President Donald Trump put the blame squarely on the Fed for continuing to raise rates through the end of last year.

"China is not our problem, though Hong Kong is not helping. Our problem is with the Fed. Raised too much & too fast. Now too slow to cut...," Trump tweeted on late Wednesday.

We are winning, big time, against China. Companies & jobs are fleeing. Prices to us have not gone up, and in some cases, have come down. China is not our problem, though Hong Kong is not helping. Our problem is with the Fed. Raised too much & too fast. Now too slow to cut....

— Donald J. Trump (@realDonaldTrump) August 14, 2019

Senior U.S. officials said on Wednesday China has made no trade concessions after Trump postponed the 10% tariffs on over $150 billion worth of Chinese imports, the latest sign that efforts to reach a trade deal were going nowhere.

Major currencies were relatively calm, with the dollar index .DXY easing 0.1% to 97.936 and the euro EUR= adding a marginal 0.1% to $1.1144. The Japanese yen was steady versus the greenback at 105.93 per dollar, having firmed 0.8% on Wednesday.

“The markets are digesting the sharp overnight setback, triggered by the inverted yield curve. But I think we’ll see some calmness back before long since the U.S. curves inverted only temporarily, not on a closing basis,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management.

Gold rose over 1% on Wednesday as an inverted U.S. Treasury yield curve and weak euro zone data drove investors toward safe-haven bullion.

Spot gold stood at $1,518.55 per ounce early Thursday, flat on the day and not far from its six year high marked Tuesday.