Stocks up early, day after big drop; global stocks lower


The threat of a recession doesn't seem so remote anymore, and stocks sank Wednesday after the bond market threw up one of its last remaining warning flags on the economy's health.

On Wednesday, the benchmark 10-year Treasury bond yield broke below the 1.632 percent yield of the 2-year bond.

An inversion like the one taking place Wednesday has preceded the last nine recessions dating back to 1955, though it doesn't always mean recession is imminent, as in 1966 when no recession formed after an inversion. My guess is we're probably in for this until after Labor Day.

The Dow Jones Industrial Average slid 800.49 points, or 3.05 percent, at the end of trading Wednesday, while the S&P 500 shed 2.93 percent and the Nasdaq Composite dropped 3.02 percent.

Banks were also hit hard, with economists already expecting more rate cuts to combat a slowing economy.

Gold prices, which have climbed nearly 20% since late May on uncertainty driven by the U.S. -Sino trade spat and global growth concerns, rose after China threatened to retaliate against the latest U.S. tariffs, renewing investor unease about the row.

As the Sino-U.S. trade war escalates, long-dated bond yields have fallen across the developed world, flattening yield curves in what is considered a clear signal of a worsening growth outlook. Employers are adding jobs at a steady pace, the unemployment rate remains near a 50-year low and consumers are optimistic.

This action in the bond market followed data which demonstrated Chinese industrial production growth in the world's second-largest economy had slowed to 4.8 percent year-over-year - the lowest level since 2002.

Addressing to a horrendous set of Wednesday (August 14th) data dragging global markets downwards, chief executive of Horizon Investment Services in Hammond, Indiana, Chuck Carlson said, "It was all negative and not much positive today".

Meanwhile, China said its factory production was the weakest in 17 years, while Germany, Europe's most powerful economic engine, said its economic output shrank in the April-to-June period by one-tenth of a percentage point. European markets fell after Germany's economy contracted 0.1% in the spring due to the global trade war and troubles in the auto industry.

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And while analysts concerns are certainly worth heeding, moves in the stock market-from investors-tend to tell a more concrete story.

The other major United States indices, the S&P 500 and Nasdaq, also dropped by about 3 per cent each, while European markets were caught in the sell-off as well.

Uncertainty about the U.S.

It's an indication that investors have lost faith in the soundness of the US economy.

Bonds of longer duration should have higher yield, but it's dipped below for several longer-term bonds.

The typical gap between the yields on bonds maturing in two years and 10 years reversed itself, as investor hunger for longer-term bonds pushed longer-term yields below shorter-term.

But the two-year yield ... well, unlike the three-month yield, it should be pricing in any anticipated rate cuts to a significant extent, since a lot of them are likely to happen within the next two years.

CMC Markets' analyst Margaret Yang said sentiment turned "extremely bearish" on the yield curve inversion, which is perceived to be a fairly reliable indicator of an upcoming economic recession.

When the three-month yield rose above the 10-year yield earlier this year, it drew more attention. Traders often pay more attention to the two-year and 10-year spread.