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Risk assets tumble as recession warning signs flash

The S&P500 fell almost 3% during Wall Street trade, backing up a European session in which the FTSE100 shed 1.5% and DAX dropped over 2%.

Fear takes hold of the market

Panic has once again taken hold of market sentiment, overnight. Despite the trade war reprieve of the evening before, market participants have gone back to preparing for the worst, as signs seemingly flash everywhere that the global economy is falling off a cliff. German GDP data showed the contraction in growth in that economy the market has long been concerned about, while China's monthly data dump presented a much worse set of numbers for the Middle Kingdom’s economy. The dynamic has seen another night deep tumble in equities markets in Europe and North America, as investors flock to government bonds to seek safety from the rout.

Risk-off, safe havens rally

So: the S&P500 fell almost 3% during Wall Street trade, backing up a European session in which the FTSE100 shed 1.5% and DAX dropped over 2%. Oil prices tumbled as concerns about global demand wash-out any bullishness generated by recent assurances from OPEC that it would carefully manage the supply side. The Japanese Yen is back into the 105 handle, while the USD is also stronger. Gold is rallying too, as the pool of negative yielding bonds continues to swell. And SPI Futures suggest that the ASX 200 will feel the pain acutely, with the ASX 200 expected to open 125 points lower this morning.

Yield curves flash recession signs

Bond markets, as they are wont to do, are speaking the most sense. Price action across the US Treasury yield curve is flashing red right now. The run towards liquid, quality and safe assets has pushed US bond yields down over 10 points across the curve overnight. More concerningly, however, is what's happening in the shape of the curve. The spread between 2 Year Treasury note and the 10 Year Treasury narrowed to less than 1 basis point during Wall Street trade. An inversion in this spread is the most popular - though admittedly not the best - indicator of an upcoming recession in the US.

Markets bet again on easier monetary policy

One saving grace is that an inversion between the 2 Year and 10 Year US Treasury notes normally portends an upcoming recession, not an immediate one. The time lag is normally around 12-to-18 months. Regardless, the phenomenon itself puts the writing on the wall for the market, and policy makers. And the former thinks the latter will be listening. Bets of the imminence and aggressiveness of interest rate cuts from the world's major central were raised last night. Markets, for one, think the US Fed is a 35% chance to cut rates by 50 basis points next month.

Trends turning to the downside for stocks

The concern now for stock market bulls is that momentum for stocks is on the cusp of definitively shifting to the downside. Technically speaking, short-term momentum had already turned south in recent weeks. But despite the prevailing bearishness in the market, longer term indicators of momentum have remained supportive of the market, and modestly pointed to the upside. With last night’s price action, especially on theS&P 500, the market’s resilience is being thrown into question. The index closed below its 200-day exponential-moving-average, opening up the possibility of an accelerated move lower in the coming days and weeks.

Fear to rob markets of rationality for a while

Financial markets for the next 24 hours are likely to be very emotionally charged. That means the economic data and fundamental news flow will probably be subordinated by the fear dominating market sentiment currently. Regardless, some important economic data will be printed in Australia and abroad in the next 24 hours. Australian jobs numbers are printed this morning, while US Retail Sales data is published tonight. The US consumption figures present as another potential irritant to an already sore-and-sensitive market. American consumption has been strong in recent times. If it too looks like it’s beginning to wane, then recession fears can only fester more.

Jobs numbers highlight local trade

Labour market figures locally, though arguably the biggest domestic news today, will probably cede to global-macro issues as a driver of market activity today. Central bankers are increasingly looking abroad to take their cues on future monetary policy direction, and the market is likely to judge that the RBA’s next move will depend more on global concerns, rather than the minutiae contained within local data. Nevertheless, today’s jobs numbers will give an update on the “spare capacity” problem in the Australian economy. Following yesterday’s flat Wage Price Index numbers, the unemployment rate is forecast to have remained steady at 5.2% last month.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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