Michael McCarthy, chief market strategist at CMC Markets in Sydney, notes that although the bond market was the trigger for the trauma on stock markets in the past 24 hours, not every inversion in the US curve has led to a recession. But he says that might not be enough to prevent a rush for the exits amid a delicate geopolitical position:
However markets were in no mood for subtlety, and the damaging moves may provide their own rationale for more selling. The sell-off comes despite a better than forecast US earnings season. More than 90% of SPX500 companies have reported. Aggregate earnings are up around 2%, beating forecasts of a negative quarter.
He also said that poor earnings result in Australia, especially from the telco giant Telstra, would keep the pressure on stocks down under:
Australian company results could add to market pressures. Telstra reported a 40% drop in profit, worse than forecast. Optimistic messages around the introduction of the 5G spectrum may not be enough to stem investor displeasure. Other misses include Blackmore’s, Cleanaway, Treasury Wine Estates and Super Retail. Both Sydney Airports and QBE Insurance delivered earnings above expectations, and funeral group Invocare surprised with a 7.5% lift.
So what is an inverted bond yield curve?
A major factor in yesterday’s selloff was the inverted US bond yield curve – not helped by recession warnings from Germany and China. It is a very predictor of recession and preceded all six of the previous US recessions.
It’s not often it becomes a topic for everyday conversation. So in case you get stuck next to the water cooler and feel like making some small talk, here’s a quick explainer.
In normal times, investors would expect a higher return, or yield, for buying longer-term government bonds. Conversely, the shorter-term bonds, such as two-year bonds, give you less return.
But as you can see in the theoretical chart below, the normal curve turns the other way, or inverts, when the yield on longer-term notes falls in relation to shorter-term. It indicates that investors see trouble ahead …
It looks more like this in the real world:
You can go for the PhD level with this column from our economics editor, Larry Elliott:
In Japan the Nikkei index is down 2.1% this morning. Stocks are suffering amid the fears of a global downturn but are also being pushed down because the value of the yen is rising. The Japanese currency is a “safe haven” asset and goes up in times of crisis – rather like gold and the Swiss franc which are both also up today.
A higher yen is bad news for Japan’s export-reliant big manugfacturers, hence the falling stock market.
Here’s Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo:
When volatility rises, dollar/yen becomes strongly correlated with [US] treasury yields, so the currency pair has more room to fall. I expect other safe havens to rise. The mood is downbeat, because of the trade war and bad economic data.
‘Turbulence will continue,’ Australian stock market boss says
Market turbulence will continue over coming months, the chief executive of the Australian Stock Exchange says.
As the benchmark ASX200 took a 2% hit in early trading this morning, the ASX chief executive, Dominic Stevens, said the 2020 financial year would see “elevated volatility” because of the geopolitical situation and the changing expectations for interest rates.
My colleague Ben Butler writes that with rates at record lows the market expects further cuts in coming months as the Reserve Bank tries to boost Australia’s sluggish economic growth.
But while markets around the world may be melting down, it’s been a good year for the ASX. It said this morning that profits after tax had risen 10.5% in the year to 30 June, to $492m. Shareholders in the market operator will reap the benefits, trousering dividends for the year totalling 228.7c a share – up 5.7% on last year’s payout – plus a special dividend of 129.1c a share from the sale of ASX’s stake in technology company Iress.
Australia opens down 1.8%, Japan off 1.9%
Trading has started in Asia with steep falls – as expected – in Australia and Japan.
Good morning/evening … wherever you are in the world, welcome to the Guardian’s business live blog which is starting early today before what’s expected to be a turbulent day on the financial markets.
My colleague Graeme Wearden covered all the action in the UK, Europe and the US on Wednesday and you can catch up on his blog here.
But in the meantime here are the main points:
- Wall Street suffered huge losses after an inversion in the US bond yield curve sparked fears of an imminent recession.
- The Dow Jones plunged 800 points, or 3%, its fourth largest decline in history. The S&P500 and Nasdaq were also down heavily.
- Fears were compounded by GDP figures in Germany pointing to a recession there and data in China showing industrial production was down 17% in July.
- The numbers sent European markets down, with the FTSE100 off more than 100 points.
- Oil slumped on fears of a global downturn.
- Donald Trump lashed out at the Fed chairman, Jerome Powell, calling him “clueless”.
Here’s our news wrap of yesterday – and I’ll have today’s opening scores in a few minutes when trading starts in Sydney.