Wednesday August 14th

14-08-2019

Dow set to fall 350 points after bond market flashes a recession warning, bank stocks drop

U.S. stock index futures were set to open lower Wednesday morning, giving back some of Tuesday’s solid gains, after the U.S. bond market flashed a troubling signal about the U.S. economy. Futures on Dow Jones Industrial Average indicated a negative open of about 352 points. Futures on the S&P 500 and Nasdaq Composite were both lower, as well. The yield on the benchmark 10-year Treasury note on Wednesday broke below the 2-year rate, an odd bond market phenomenon that has been a reliable indicator for economic recessions. Investors, worried about the state of the economy, rushed to safe haven assets, pushing the yield on the benchmark 30-year Treasury bond to a new record low on Wednesday. Bank stocks led the declines in the premarket as it gets tougher for the group to make a profit lending money in such an environment. Bank of America and Citigroup both fell more than 3% in premarket trading, while J.P. Morgan dropped 2.8%. The SPDR S&P Regional Banking ETF is down 2.65% in premarket. “The U.S. equity market is on borrowed time after the yield curve inverts,” wrote Bank of America technical strategist Stephen Suttmeier. There have been five inversions of the 2-year and 10-year yields since 1978 and all were precursors to a recession, but there is a significant lag, according to data from Credit Suisse. A recession occurred, on average, 22 months after the inversion, Credit Suisse shows. And the S&P 500 actually enjoyed average returns of 15% 18 months after an inversion before it eventually turns. The last time this key part of the yield curve inverted was in December 2005, two years before the recession hit. “Historically speaking the inversion of that benchmark yield curve measure means that we now must expect a recession anywhere from six-to-18 months from today which will drastically, and negatively, shift our medium-to-longer term outlook on the broader markets,” Tom Essaye, founder of The Sevens Report, said in a note on Wednesday. Shares of Macy’s tanked 12% in premarket after the retailer posted second-quarter earnings that are way below analysts’ expectations as heavy markdowns used in spring to clear unsold merchandise weighed on profits. Investors also remained on edge about the U.S.-China trade war and its impact on the global economy as weaker-than-expected data in China deepened the gloom in the world’s second-largest economy. Official data published Wednesday showed growth of China’s industrial output slowed to 4.8% in July from a year earlier, marking the latest sign of faltering demand in the country. The data came after the U.S. moved to delay tariffs on some Chinese imports in the previous session. The United States Trade Representative announced Tuesday that certain products including clothing and cellphones were being removed from the tariff list based on “health, safety, national security and other factors” and will not face additional tariffs of 10%. Other tariffs will be delayed to Dec. 15 from Sep. 1 for certain articles, it said. President Donald Trump said Tuesday that the move was designed to avoid any potential impact on holiday shopping ahead of Christmas season. He added China would very much like to make a trade deal. Wall Street cheered the announcement, with the Dow jumping as much as 529 points before settling to finish the day 372 points higher. China’s Commerce Ministry said Vice Premier Liu He had spoken by phone with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Tuesday and they agreed to talk again in two weeks. Stocks in Asia Pacific edged up on Wednesday as the U.S. announced a delay in the implementation of tariffs on some Chinese goods. Shares in mainland China rose on the day, with the Shanghai compositegaining 0.42% to 2,808.91 and the Shenzhen component adding 0.72% to 8,966.47. The Shenzhen composite also advanced 0.692% to 1,509.00. Elsewhere, Japan’s Nikkei 225 rose 0.98% to close at 20,655.13, while the Topix index also advanced 0.87% to end its trading day at 1,499.50. Over in South Korea, the Kospi gained 0.65% to close at 1,938.37. Oil prices fell on Wednesday on disappointing economic data from China and Europe and a rise in U.S. crude inventories, partly erasing the previous session’s sharp gains after the United States said it would delay tariffs on some Chinese products. Brent crude was down 2.95%, at $59.49 a barrel, after rising 4.7% on Tuesday, the biggest percentage gain since December. U.S. West Texas Intermediate (WTI) crude future was down 3.3%, at $55.22 a barrel, having risen 4% the previous session, the most in just over a month. Gold prices rose 1% on Wednesday, after falling as much as 2% in the previous session, as an inversion in U.S. Treasury yields and a slew of weak economic data from China and Germany raised fears of a global recession. The U.S. Treasury yield curve inverted for the first time since 2007, a sign that the world’s biggest economy could be heading for a recession. Spot gold was up 0.9% at $1,514.33 per ounce, after rising about 1% earlier. U.S. gold futures were up 0.8% at $1,525.70.