(Reuters) - Australian and New Zealand shares fell sharply on Thursday as investors sold off equities globally in search of safety after a drop in a U.S. bond yield curve highlighted the risk of recession.
The yield on the U.S. Treasury 10-year note <US10YT=RR> briefly fell below the two-year yield <US2YT=RR>, a pattern that is widely seen as an indicator of a looming recession.
The inversion, as it is known, last happened in 2007 and proved to be correct when the global financial crisis hit the following year.
The S&P/ASX 200 index <.AXJO> sank 2.9% to 6,408.1 points, its lowest level since early June. The benchmark had managed a 0.4% gain on Wednesday after U.S. President Donald Trump delayed tariffs on some Chinese imports, easing some fears over the escalating U.S.-China trade war.
Worries of contagion gripped markets, with investors shifting money away from sectors such as financials and mining to the relative safety of gold.
Australia has proved in the past to be relatively resistant to global recessions and was one of the few developed economies that escaped the crisis in 2008. However, interest rates are now at record lows, limiting the tools that the central bank has at its disposal to combat weakness.
Australia's Big Four banks - Commonwealth Bank of Australia CBA.AX, Westpac Banking Corp WBC.AX, National Australia Bank NAB.AX and Australia and New Zealand Banking Group ANZ.AX - each slumped around 3%.
Australian miners, which are highly dependent on continuous global growth for demand, were firmly in the red.
BHP Group <BHP.AX> and Rio Tinto <RIO.AX> dropped 2.8% and 2.7%, respectively.
The oil and gas sector suffered heavy losses as well, with Woodside Petroleum <WPL.AX> closing 6.7% lower. The company earlier posted a smaller half-year profit than a year earlier and lowered its interim dividend.
Aside from gold stocks <.AXGD>, one of the few gainers was Treasury Wine Estates <TWE.AX>, which closed 2.2% higher after proving it could withstand the impact of the trade war by posting a record annual profit.
Qantas Airways <QAN.AX> dropped 4.6% amid the wider sell-off, after Boeing <BA.N> said it was facing engine-related delays on its 777X wide-body planes that may hamper Qantas' crucial 21-hour non-stop Sydney-London flights in 2023.
New Zealand's benchmark S&P/NZX 50 index <.NZ50> closed 1.3% lower at 10,704.11.
Dairy product maker a2 Milk <ATM.NZ> slipped 2.1% and utilities form Meridian Energy <MEL.NZ> declined 1.9%.
(Reporting by Nikhil Kurian Nainan in Bengaluru)
