New York Stock Exchange
Traders work on the floor of the New York Stock Exchange on Tuesday. The S&P 500 Index recouped its Monday’s losses in early trade after Trump administration extended a grace period before tariffs take effect on a broad range of consumer goods. Image Credit: AFP

Recession fears are spreading among investors at a time when valuations across major assets are looking dangerously stretched following years of monetary stimulus, the latest Bank of America Corp. survey shows.

About a third of asset managers polled believe a global recession is likely in the next 12 months, the highest probability since 2011 — when Europe was engulfed by a sovereign-debt crisis. Trade war concerns rose, topping the list of the biggest tail risks, followed by the fear of monetary policy impotence, according to Bank of America’s report.

This month’s escalation in the US-China trade spat sent investors searching for havens as the growth outlook darkened. Central banks across the world this year have been trying to support the economy by pledging further stimulus. However, such efforts have also increased the threat of bubbles in key markets.

Fund managers surveyed by Bank of America see corporate and government bonds as particularly vulnerable to bubbles created by monetary officials, followed by US stocks and gold. At the same time, only 11 per cent of polled investors see fiscal policy as overly stimulative.

Stocks fell sharply on Wall Street on Monday, knocking nearly 400 points off the Dow Jones Industrial Average. The benchmark S&P 500 had its worst day in a week as the sell-off put the market deeper into the red for August. The selling was widespread, with technology companies and banks accounting for a big share of the decline. Investors sought safety in US government bonds, sending their yields tumbling. The price for gold, another traditional safe-haven asset, closed higher.

Trade war and geopolitics

US stock index futures fell on Tuesday, tracking a global shift out of riskier assets, as investors grappled with simmering geopolitical tensions and fears of a recession due to a drawn-out US-China trade war.

Increasingly violent protests in Hong Kong and a crash in Argentina’s currency and its stock market pushed up demand for US bonds, gold and the Japanese yen.

“Where markets head next will largely hinge on whether the threatened tariffs are implemented, and how the Federal Reserve responds,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a note.

President Donald Trump’s latest tariff threat on Chinese goods has raised bets of at least three more rate cuts this year, with a reduction in rates at the Fed’s September meeting being fully priced in, according to CME Group’s FedWatch program.

Markets retreated in Asia on Tuesday as uncertainty over the China-US trade talks was compounded by increasing tensions in Hong Kong and an economic crisis in Argentina. Investor confidence has been knocked this month by a perfect storm of negative issues, only slightly offset by hopes for further central bank easing measures as the global outlook dims.

Sliding confidence

Latest data from around the world shows investor confidence is declining rapidly. The mood among German investors plummeted far more than expected in August, a survey showed on Tuesday, and the ZEW institute blamed trade disputes and higher chances of a no-deal Brexit for a worsening outlook in Europe’s biggest economy.

ZEW said its monthly survey showed economic sentiment among investors fell to -44.1 from -24.5 in July, its lowest level since December 2011. Economists polled by Reuters had expected a drop to -28.5.

Germany’s DAX hit a day’s low after ZEW published the survey. The weak reading bodes ill for the German economy, which the government expects to grow by a meagre 0.5 per cent this year, and many economists expect to see a contraction in the second quarter when data is released on Wednesday.

Singapore on Tuesday cut its annual growth forecast as the escalating US-China trade war hammers exports, in another ominous sign for Asia’s trade-reliant economies. The government said it expected growth of 0.0-1.0 per cent this year, sharply down from the 1.5-2.5 per cent previously estimated, marking the second downward revision this year. The economy expanded 3.2 per cent in 2018.

The export hub is highly sensitive to external shocks and has traditionally been one of the first places in Asia to be hit during global downturns — with ripples then spreading out across the rest of the region.

Shipments from the city-state have plunged while its economy suffered a surprise quarter-on-quarter contraction in the three months to June, as Beijing’s row with Washington hit the complex global trading system.

— Bloomberg, Reuters & AP