London, New York: 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.
Wall Street stocks were back in sell-off mode early Wednesday as weak economic data from China and Germany and a key US Treasury benchmark exacerbated global recession fears.
About 20 minutes into trading, the Dow Jones Industrial Average was down about 400 points, or 1.5 per cent, at 25,879.21.
The broad-based S&P 500 slid 1.5 per cent to 2,882.33, while the tech-rich Nasdaq Composite Index dropped 1.7 per cent to 7,877.59.
The sell-off came shortly after the yield on the 10-year US Treasury note briefly slid below the yield on the two-year bond, a dynamic that is often seen as a harbinger of recession.
The decline followed the latest stream of weak economic data from overseas, including the weakest Chinese factory output data in 17 years and official German data that showed negative growth in the second quarter.
The gloomy economic reports have fuelled expectations that the leading central banks will undertake new stimulus measures. The Federal Reserve cut interest rates last month for the first time in more than a decade and is expected to make additional cuts in the months ahead.
“The so-called yield inversion signalled that the US economy could be a little more than a year away from recession,” said a note from Joe Manimbo, senior market analyst at Western Union Business Solutions.
“Sinking yields are the bond market’s way of pressuring the Fed to step on the monetary gas pedal and cut interest rates. Others worry that central bankers may be low on tools to ward off recession given that policy settings are already accommodative.”
Eurozone indices were around two per cent down by the mid-afternoon, while on Wall Street the Dow Jones index lost nearly 400 points at the New York opening bell.
Shanghai managed to end with a gain of 0.4 per cent 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.
Slumping exports sent Germany’s economy into reverse in the second quarter, with prospects of an early recovery slim as its manufacturers struggle at the sharp end of a global slowdown amplified by tariff conflicts and fallout from Brexit.
Overall output fell 0.1 per cent quarter-on-quarter, data showed on Wednesday. With pressure growing on a thus far reluctant government to provide more fiscal stimulus, the economy minister said action was needed to prevent a second consecutive quarter of contraction that would tip the country into recession.
The global slowdown, reinforced by Chinese industrial output expanding at its lowest rates in 17 years in July, has broadly impacted the Eurozone, where corresponding data showed second quarter growth halved to 0.2 per cent.
But Germany’s traditionally export-reliant economy — Europe’s largest — has been particularly vulnerable, amid signs that the boost it has received from a sustained period of surging domestic demand is waning.
