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US blue chips plunge 800 points as bond yield inversion flashes up recessionary signal

At the close the Dow Jones Industrial Average was down a whopping 800 points, or over 3% at 25,479, falling below its 200-day moving average

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Yields for 2-year and 10-year T-bonds inverted - meaning short-term debt yielded more than the longer-term note - for the first time since 2007

The rug was pulled out from under US stocks on Thursday, with the Dow dropping sharply to breach key technical levels as worries over a global recession were stoked by a worrying signal in bond markets.

At the close the Dow Jones Industrial Average was down a whopping 800 points, or over 3% at 25,479, falling below its 200-day moving average at 25,585.34, levels which are viewed by technical analysts as gauges of long-term bullish and bearish momentum.

The Dow had not previously closed below that long-term average since early June.

The broader market was also under intense pressure, with the S&P 500 index dropping 2.9% and the tech-laden Nasdaq Composite also shedding 3%.

Global markets all fell off a cliff on Thursday as the Treasury markets sent out a recessionary signal, with yields for 2-year and 10-year bonds inverting - meaning short-term debt yielded more than the longer-term note - for the first time since 2007.

Meanwhile, the US 30-year T-bond fell to a record low further denting expectations for the long-term economic outlook

Risks tilted very much to the downside

Neil Wilson, Chief Market Analyst for Markets.com commented: “The 3mo10yr curve has been inverted for some time already but the fact that 2s10s has also gone this way is a massive red warning light for the US economy.

“It’s the first time it’s happened since 2007. Meanwhile the 30-year has slumped to a record low. The market is saying the risks are tilted very much to the downside. We are in a new phase of the cycle for markets now.”

Wlson continued: “To recap well-worn turf, this inversion been a reliable indicator of recession many times in the past, calling seven out of the last nine. There is undoubtedly a chance of this, although we must caution that so far the US data has been pretty sturdy in the face of global headwinds and the trade policies of the White House. 

He concluded that the yield curve inversion is a sell signal for risk assets and should put extra pressure on equities.

Gold pushed up higher on the news, spiking through $1506, as it cemented its recovery after yesterday’s sell-off, Wilson added.

But some comfort offered

Economists at ING, however, were not all ‘doom and gloom’, pointing out that there is always the argument that “things are different this time” and adding that there is certainly a strong case that can offer some comfort.

In a note they said: “The lagged effects of the Fed’s quantitative easing programme has made the curve flatter than it otherwise would be (relative to previous cycles). After all, the trillions they invested in the Treasury market were to stimulate the economy by driving down borrowing costs through the economy, boost liquidity and make higher-risk assets look more attractive.

“There have also been arguments about the perceived time value of money given ageing populations around the world, making people more willing to hold such assets, but at the current juncture, the negative yields in Europe are a bigger factor in play. This is making the positive yielding US Treasuries look incredibly attractive and those European managers that have some discretion or flexibility on where they can invest are taking advantage. Throw in the US’ safe-haven status and the seeming solidity of the dollar for now and it is unsurprising managers are moving more of their allocations here.”

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