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The Guardian - AU
The Guardian - AU
Business
Martin Farrer in Sydney (earlier) and Graeme Wearden in London (now)

Markets jittery as trade war and recession worries spook investors -as it happened

A trader in Seoul
Asian markets are set to open sharply down on Thursday after the inverted bond yield sparked huge losses on Wall Street and in the UK. Photograph: Ahn Young-joon/AP

Update: Britain’s FTSE 100 has hit a new six-month closing low.

The blue-chip index just closed 80 points lower at 7,067, a drop of 1.1%.

Recession fears dragged the market down, with mining companies, and financial stocks leading the sell-off.

Summary

Time for a quick recap

Financial markets remain volatile today, as fears of an economic downturn hit stock prices and drive bond prices to new record highs.

Shares fell sharply in parts of Asia, with Australia suffering its worst day of 2019.

In London, the FTSE 100 has tumbled to its lowest level since the end of February - down 80 points at pixel time, with mining companies and banks among the top fallers.

European markets also hit six-months lows, as concern grows that Germany could be sliding into recession (it shrank in the last quarter).

America’s bond yield curve inverted for the second day running, with 10-year Treasury bills trading at a lower yield than 2-year T-Bills. Some experts see as a clear warning sign of a recession, although others disagree.

Retail sales have beaten expectations in both the UK and the US, calming some fears of a slowdown.

After a nervy start, the Dow Jones industrial average is up 60 points -- having shed 800 points in an alarming selloff yesterday.

The US-China trade war has flared up again. Beijing spooked investors by announcing it would impose counter-measures in response to America’s plan to raise tariffs on $300bn of Chinese goods. But officials also spoke about meeting US half-way in search of a deal.

Donald Trump, though, has insisted that any breakthrough will be on Washington’s terms.

He’s also weighed in on the Hong Kong protests:

Updated

Pound strengthens

Elsewhere in the markets, sterling has hit its highest level this week.

The pound has gained three-quarters of a cent, to $1.2122. Traders are citing efforts to prevent a no-deal Brexit, as MPs try to stop Boris Johnson crashing the UK out of the EU at the end of October.

On one hand, you have Labour leader Jeremy Corbyn trying to persuade Conservative rebels to vote against their own government in a no-confidence vote.

On the other, the opposition Liberal Democrats are resisting Corbyn’s advances, and proposing a unity government led by someone else.

The pound’s strength is helping to push the FTSE 100 down -- the index has recovered some of its early losses, but is still down 80 points at 7068, down 1%.

After its worst day of 2019, Wall Street has just opened cautiously.

The main stock indices are slightly lower, with traders keeping their powder dry while recession worries rage.

The Dow Jones industrial average has dipped by 28 points, or 0.1%, having slumped by 800 points on Wednesday (its fourth biggest points loss ever, although much less dramatic in percentage terms).

Technology stocks are also weakening a little, pushing the Nasdaq a little lower (like the Dow, it lost 3% yesterday).

Open of Wall Street
Today’s opening moves Photograph: Bloomberg TV

Trump: Must have China deal on our terms

Newsflash: Donald Trump has now weighed in, saying that the US-China trade deal has do be done “on our terms”.

That’s pushing back against Beijing’s call for a compromise “half way”.

Lori Calvasina, head of US equity strategy at RBC, thinks Trump is being too ambitious.

Given the clashes in Hong Kong, Beijing can’t afford to look weak over trade, she says on Bloomberg TV.

Less good news: US factory output declined by 0.4% in July, new data show.

That’s a little worse than expected, and follows a 0.6% gain in June.

It could be a sign that American manufacturers are struggling.

Mohamed A. El-Erian, chief economic adviser at insurance giant Allianz, has dismissed talk that America could be heading into recession as “silly”.

But he also warns that the stock markets will be more volatile in the months ahead, even though the strength of US consumer spending could insulate the US economy from problems overseas.

Here’s a clip from CNBC:

US retail sales stronger than expected, calming nerves

Shops in the Uptown Mall on Main Street, Sedona, Arizona, USA
Shops in the Uptown Mall on Main Street, Sedona, Arizona, USA Photograph: Alamy

Just in: US retail sales were stronger than expected last month, calming fears of an imminent recession.

American shoppers spent 0.7% more in July than in June, beating expectations of a 0.3% rise.

As in the UK (see earlier post), internet shopping provided a big boost -- again, Amazon Prime Day is a likely reason.

It’s hard to keep track of all the maneuvers in the US trade war.

But helpfully, the Peterson Institute’s Chad Brown has explained America’s latest move - to impose higher tariffs on clothing, shoes and technology products made in China:

Wall Street isn’t even open yet, but the futures market has been pretty darn lively - hit by recession worries and trade war tensions.

China: Hope to meet US half-way

Newsflash: China has now made some more conciliatory comments about the trade war with the US.

The Ministry of Finance has said that it hopes to meet America “half-way” to resolve the dispute, and that presidents Xi and Trump are in touch through phone calls and letters, as well as their recent meeting at the last G7 summit.

This is helping the markets to recover some ground - European stock markets are now a little higher again, and Wall Street is tipped to recover some ground too. What a day!

How might China retaliate against the US’s latest tariffs on $300bn of its exports?

It can’t simply respond in kind. China only bought $120bn of goods from America in 2018, and has already imposed tariffs on them, in response to earlier US sanctions.

Beijing could raise its existing tariffs, I suppose but that would badly hurt Chinese consumers and companies (who would pay the tariff).

Instead, policymakers could use non-tariff measures. It could allow the yuan to fall in value, or cut off purchases from America altogether in favour of other countries (Brazilian soybeans, anyone?).

The nuclear option, as Eleanor Creagh of Saxo Bank points out, would be to stop buying US government debt. That would shake the markets, as China has been such a huge buyer of US Treasuries.

Ironically, such a move might drive down the prices on US debt, pushing up yields and ending the yield curve inversion.....

Oil is continuing to slide today, hit by fears of a global downturn.

Brent crude has dropped by 2.5% to just over $58 per barrel.

It was already a rough day in the markets, even before China ratcheted up the trade war tensions:

Hold onto your hats, folks. The Dow Jones industrial average is now tipped to lose more than 200 points when trading begins, a drop of 0.8%.

That’s on top of yesterday’s 800-point slide.

August has been a torrid month for the markets, and we’re only halfway through it!

Britain’s FTSE 100, for example, has fallen by over 7% in the last two weeks - from 7,586 points to just 7028 right now (down another 120 points today!).

The Footsie is still up 5% this year, so it’s not disastrous. Plus, August is notoriously volatile (liquidity is lower as investors take their holidays).

The FTSE 100
The FTSE 100 Photograph: Refinitiv

Fund manager Brent Carlile thinks China’s threat is a response to Donald Trump’s decision to delay tariffs on Chinese-made consumer goods until December.

That concession is meant to protect US consumers from pre-Christmas price hikes - but could also look like weakness from the White House.

Crumbs. Shares in Europe’s banking sector are down 1.2%, hitting their lowest level since 2012 - when the eurozone debt crisis was raging.

Mining companies are among the top fallers in London, dragging the market deeper into the red.

The FTSE 100 is now down 92 points at 7056, its lowest level since the end of February.

Anglo American are down 5.7% and Glencore has lost 4.5%. Demand for coal, copper and iron ore will all decline if a trade war creates a global downturn.

Financial stocks are also suffering from recession fears, with Royal Bank of Scotland and Standard Life Aberdeen both losing 3.5%.

One for the chartists out there:

President Trump could retaliate to China’s threatened retaliation by imposing higher tariffs on all Chinese imports, suggests Jasper Lawler of London Capital Group.

Currently, the US is planning to levy a 10% tariff on the $300bn of Chinese goods that isn’t already being taxed. That kicks in next month, although some consumer goods will be spared until December.

Ouch! The Stoxx 600 index of Europe’s top listed companies has hit its lowest level since February, down another 0.7% today.

China’s threatened retaliation is a slap in the face to Donald Trump.

Yesterday, the US president claimed that Beijing was keen to make a deal, and even suggested a personal meeting with Xi Jinping to help resolve the protests in Hong Kong.

I think we can expect a sharp response once @realDonaldTrump wakes up.....

CRICKET Atherton duck 3England’s Michael Atherton is bowled out for a duck.
Market optimism has collapsed faster than the England cricket team on a bad day Photograph: PA

Neil Wilson of Markets.com says the threat of a deepening US-China trade war has spooked investors, wiping out the early recovery in Europe.

This was always a very precarious bounce and it has died a quick death. Like a 1990s England Test top order it couldn’t even make it to lunch. Let’s see where we’re at by stumps.

European indices rolled over into the red to hit day lows as a series of news flashes indicated further worries about trade, with China saying the US has violated past agreements with the 10% tariffs and that Beijing will have to take countermeasures.

Any retaliation from Beijing could encourage America to hit back hard, Wilson adds:

This does not bode well and may encourage Trump to react – there is a chance he could bring forward all the tariffs to September 1st.

Countermeasures suggests China is not interested in the delay to tariffs – and may have sniffed a weakness in the US position and is keen to exploit it. Retaliation by China means escalation in tensions, and diminishes the chances of a positive outcome in the near term.

Risks are still to the downside. As ever, though, only a tweet away.

Updated

FTSE 100 hits five-month low as trade fears return

European stock markets are sliding sharply, following Beijing’s threat to impose new trade sanctions on the US.

In London, the FTSE 100 has tumbled by 1%, losing 69 points to 7078 points - on top of the 103 points lost yesterday. That’s its lowest point since March.

The German DAX has hit a new five-month low too, and there are losses in France and Spain too.

European stock markets
European stock markets today (ignore Italy, it’s closed) Photograph: Refinitiv

The prospect of Beijing retaliating to America’s latest tariffs is also dampening the mood in New York. Wall Street had been expected to rally after yesterday’s slump - but that putative recovery is fizzling out.

Here’s Reuters’ take on Beijing’s pledge to retaliate in the ongoing trade war with America.

China has to take necessary counter-measures to the latest U.S. tariffs on $300 billion of Chinese goods, the finance ministry said on Thursday.

The ministry also said the U.S. tariffs violate a consensus reached by leaders of two countries and get off the right track of resolving disputes via negotiation.

The United States said early this month it would slap duties on $300 billion of Chinese goods from Sept. 1, which would effectively cover all of China’s exports to the United States.

But President Donald Trump backed off part of the plan on Tuesday, delaying duties on some of the items on the list such as cellphones, laptops and other consumer goods, in the hopes of blunting their impact on U.S. holiday sales. Tariffs will still apply to those products from mid-December.

China accuses US of violating trade consensus

NEWSFLASH: China has launched a fresh attack on America over the trade war, giving investors another reason to panic.

The Chinese finance ministry has accused the US of violating the consensus drawn up between Donald Trump and Xi Jinping.

Specifically, Beijing is unhappy that America announced a new 10% tariff on $300bn of China’s exports this month. This move undermines efforts to resolve the trade dispute, it says.

In a worrying development, China says it will have to proceed with “countermeasures”, suggesting it will further escalate the trade war.

This is a blow - only on Tuesday, Trump backtracked and decided to delay some of the new tariffs until December, to avoid driving up the price of computer game consoles and mobile phones.

Updated

A sandcastle

Deutsche Bank analyst Jim Reid is so excited about the inversion of the US yield curve that he’s broken off from his holiday to explain why (in his view) it’s a very serious warning sign.

He points out that every US recession since the 1950s has followed an inverted yield curve (where two-year US bonds are trading at higher rates than 10-year bonds).

The gap between two-year and 10-year US government bonds
The gap between two-year and 10-year US government bonds has vanished Photograph: Bloomberg TV

That’s because such an usual situation shows that ‘animal spirits’ (or investor confidence) is waning. Central bankers have, in the past, slashed interest rates to support growth and delay a recession, but it doesn’t always work.

Reid explains:

Every inversion since 1956 has seen a recession follow. Although the median length of time to a recession is 17 months, credit spreads have pretty much exclusively widened from the point of inversion onwards.

Of those 2 of the 9 recessions since the 1950s took more than 2 years to materialise after the first inversion though. The first in the mid-1960s (took nearly 4 years) was due to a Fed policy error where the Fed didn’t raise rates as expected (they actually cut) with inflation rising. The curve re-steepened and only inverted again as the Fed reversed course and hiked a few quarters later. The recession soon followed the subsequent inversion. The second, following the May 1998 inversion, took 34 months until a recession arose but the inversion was relatively brief and occurred just prior to the Russian/LTCM crisis where the Fed rapidly cut 75bps thus re-steepening the curve. The Fed then raised rates again from 1999 and the curve re-inverted in early 2000, around a year before the actual recession.

So, the conclusion is that the Fed has successfully acted before to delay the inversion turning into a recession but only on 2/9 occasions. Given that the market already prices in 65bps of cuts before year end it feels like they might need to out-pace that to make it 3 out of 10 where they’ve delayed the recession.

Updated

Online spending boosts UK retail sales

Just in: UK retail sales grew last month, as consumer shrugged off Brexit uncertainty and fears that Britain’s economy is weakening.

Retail sales rose by 0.2% in July, the Office for National Statistics says, better than the 0.2% decline which the City expected.

Non-store retailing (such as internet shopping), surged by 6.9% during the month, and was 12.7% higher than a year ago.

That may be due to Amazon’s Prime Day, its regular summer sale. This year, other retailers jumped on the bandwagon with their own price reductions, in a bid to win sales.

The ONS also found that Britain’s battered department stores grew their sales by 1.6%, after a six-month slump.

Food sales fell year-on-year, though -- perhaps because 12 months ago Brits were gorging on barbecued burgers during the July heatwave.

European bank shares are down this morning, hit by anxiety that Germany could be sliding into recession (possibly followed by the US next year, if the yield curve is to be believed).

The Financial Times is also concerned by the surge in bond prices, saying:

A sharp rally in government bonds set fresh records on Thursday, with the yield on 30-year US government bonds falling below 2 per cent for the first time as investors sought safety amid growing fears over the global economy.

Traders have dumped riskier assets such as stocks and crude oil and moved into perceived “havens”, including bonds, sending their yields lower. On Wednesday a closely watched metric in the US government bond market turned negative, raising new recession concerns. That indicator, the yield curve, remained inverted in Thursday morning trading in London.

Anxiety over the global economy sent Japan’s stock market to a six-month low today.

Our new friend, the US inverted yield curve, is being blamed (although it isn’t an infallible recession indicator) .

Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co, says:

“The yield curve inversion prompted more investors to become concerned about the growth outlook,”

The UK government bond yield curve has also inverted for the second day running.

That’s because the rate of return on 10-year British gilts has dropped to 0.451%, below below the two-year bond which is yielding 0.455%.

As with America’s Treasuries, that shows investors are accepting a lower rate of return for longer-term lending than shorter-term lending.

Does that mean Britain is plunging into recession? Not necessarily. As economist Rupert Seggins points out, the UK yield curve has been an unreliable forecaster of economic trends. It did invert before three recessions, but also inverted on four other occasions when a recession wasn’t looming.

Another important point is that Britain can borrow very cheaply right now -- perhaps for growth-boosting infrastructure programme?

Updated

UBS: Yield curve fears are overblown

Mark Haefele, chief investment officer at UBS Global Wealth Management, is urging us all not to get obsessed by the inversion of the US yield curve.

He points out that the tumble in longer-dated borrowing costs won’t have much economic impact on its own --it’s mainly an indicator of market sentiment. And, he argues, it doesn’t mean shares are about to crash.

Haefele explains:

The length of time the yield curve is inverted, and how much is inverted, matter. If Fed rate cuts successfully steepen the curve comfortably into positive territory, this brief curve inversion may be a premature recession signal.

Neither does a yield curve inversion indicate it is time to sell equities. Since 1975, after an inversion in the 2-year/10-year yield curve, the S&P 500 has continued to rally for nearly two years, and has risen by 40% on average until hitting a bull market peak.”

Energy and financial stocks are down in London this morning, a sign that traders are pessimistic about growth prospects

European markets open higher

And we’re off!

European markets are open, and inching higher in early trading.

The Stoxx 600 index, which contains a broad sweep of EU companies, has risen by 0.3% -- hardly a major recovery from Wednesday’s 1.8% tumble.

But in London. the FTSE 100 has dropped by 14 points to 7,132, back towards yesterday’s lows. Traders are nervous, following the losses in Asia overnight and the 3% plunge on Wall Street last night.

Alex Kuptsikevich, financial analyst at FX Pro, fears that investors could talk themselves into a crisis:

The most dangerous thing in this situation is that market fears of recession could end up fuelling further demand for safe havens, further intensifying the anxiety of stock markets.

Recession fears are also driving investors into German government debt - another safe haven (even though Germany may be sliding into recession).

The yield on German 30-year bonds has fallen below minus 0.2% for the first time ever.

That negative bond yield means asset managers are prepared to pay for the privilege of lending to Berlin, and not get their money back until 2049. Hardly a sign of optimism in the global economy.

[Reminder: Bond yields, a broad measure of the interest rate on a bond, fall when prices rise].

Updated

US yield curve inverts again

Morning all. City traders are bracing for another volatile session, after European stock markets hit their lowest levels in six months yesterday.

Alarmingly, the US yield curve is inverting again this morning, suggesting investors are worried that a recession is looming.

The yield (rate of return) on America’s 10-year Treasury bills has fallen below the yield for the 2-year bond for the second day running. Investors are now getting just 1.57% on the ten year, or 1.58% on the two-year bond.

That’s worrying -- longer-dated bonds ought to trade at a higher yield, to compensate for the extra risk of lending money for longer, and for the erosion of inflation.

As many experts have been racing to tell us, an inverted yield curve has been a reliable indicator that a recession is looming (although it can take more than a year to arrive).

Investors are certainly piling into US government debt, looking for a safe place to store their money.

That’s why the yield on American 30-year government bonds plunged below 2% for the first time ever. That’s an astonishingly low return on your investment - basically matching America’s inflation rate.

Updated

Summary

I’m about to hand over to my colleagues in London but here’s what you need to know on a day when concerns about recession in the US, Germany and China have plagued markets in Asia.

  • Asian stocks have fallen across the board although losses were not as bad as in Wall Street on Wednesday.
  • The Nikkei was down 1.2% in the afternoon while the Shanghai Composite is off 0.4% and the Hang Seng is flat.
  • The biggest falls were in Australia where the ASX200 has lost almost 3%, wiping around A$60bn off the value of shares.
  • Oil has continued to tumble. Brent crude has lost another 0.6% to $59.12 a barrel, after shedding 3% on Wednesday. US crude was down 0.4% at $55.03.
  • Gold rose 0.3% to $1,521.00 per ounce and is close to its highest since April 2013.
  • The yield on 30-year US treasuries has fallen below 2% for the first time ever in another sign that interest rates are set to remain lower for longer.
  • Some analysts pushed back a bit on fears that the inverted US bond yield curve seen on Wednesday – and which sparked the 800-point fall in the Dow – is as crucial as some believe.
  • Futures trade points to a positive start in London and New York later.

Thanks for joining me.

Updated

Australian market closes down 2.85%

Ouch. The ASX200 suffers its worst day since February 2018. It’s down 2.85% at 6,408. Around A$60bn removed from values.

Updated

The Australian market is now off 2.9%, or 187 points, at 6.408 points, but we’ll know the full damage when trading closes in a few minutes. It’s easily the worst performer in Asia Pacific where traders have reduced losses in Hong Kong and Shanghai. Japan is down 1.2%.

Meanwhile, European markets are opening in an hour.

Updated

UK/European opening calls

IG are calling the market openings:

In Australia the ASX has slumped by 2.8%, a real bloodbath for a market that hit an all-time high just a couple of weeks ago.

The AMP economist Shane Oliver has been looking at today’s employment figures and he reckons the signs aren’t that great going forward.

And our own Greg Jericho has weighed in:

Updated

No blog is complete without a word from Holger.

Updated

Dutch economy to grow 1.4% next year

The Dutch economy seems in pretty good shape and will grow by 1.4% in 2020. But that is slower than expected because exports have been hit by weakening growth in Germany, Brexit and US trade policies, the country’s forecasting body CPB has said.

Flower fields in Lisse, southern Holland.
Flower fields in Lisse, southern Holland. Photograph: AFP Contributor#AFP/AFP/Getty Images

Growth in 2019 is expected to be a bit stronger than earlier expected at 1.8%, after a 2.6% expansion last year.

That compares favourably with GDP data from Germany yesterday which showed the powerhouse economy contracting by 0.1% in the June quarter.

Updated

Looking beyond Australia, Stephen Innes of Valour Markets in Singapore has written a note to clients in which he says the Fed will now be forced to cut rates again and possibly “much more profoundly than they expected”. China’s central bank could also come to the party with another stimulus package.

The steep falls in Asian markets on Thursday show that shell-shocked traders are “hoping for the best on the policy front but positioning for the worst on the economic backdrop”.

Surely the world’s central bankers are not going to allow President Trump tariff threats to snatch defeat from the jaws of victory. Not yet, anyway. Not while there’s still some monetary firepower left in their arsenal.

The Fed, now out of necessity alone will need to adjust policy much more profoundly than they expected. While the threat of addition tariffs will make Beijing more accommodative to easing as policymakers have numerous avenues and a high degree for flexibility to respond. Suggesting that mainland’s accommodative policies including infrastructure, fiscal and monetary measures will be aggressively dialled up in coming months. Even as trade tensions alternate between simmer and boil, a PBOC and Fed policy deluge could go a long way to establishing risk sentiment.

Australian shares down 2.7%

Whether it’s boom or gloom, the Australian stock market is being smashed at the moment.

The benchmark ASX200 is down 2.7% today, a fall of 179 points to 6,416. That’s a loss of more than A$50bn on this morning’s opening prices and it could be the worst day since 25 October last year when shares fell 2.8% on the day.

Telcos are down heavily after the poor Telstra numbers earlier and tech losses on Wall Street. Energy stocks are also being hammered because of the falling oil price.

Updated

Australia: is it boom or gloom?

The Australian jobs figures from earlier have, as usual, produced some difference of opinion.

In the bullish camp is Craig James, the chief economist at Commsec. He notes that overall employment has risen for the 33rd time in 34 months, up by 41,100 jobs in July against predictions of 14,000. Full-time jobs rose by 34,500 with part-time jobs up by 6,700. James writes:

What is the definition of a strong job market? We would contend that it is one where employment is rising, more people are participating in the job market and where the jobless rate remains historically low. Australia has a strong job market. While the jobless rate in Australia is higher than the US, UK and New Zealand, in Australia job growth remains strong and more people are drawing down a wage. Retailers want to see more people with jobs because that converts to more opportunities to sell their goods and services.

Jobs figures showed employment rose in Australia in July
Jobs figures showed employment rose in Australia in July. Photograph: Mick Tsikas/AAP

If you’re not sure, you’ll find a note of scepticism from the UBS economist George Tharenou who doesn’t think that it’s game, set and match for the Great Australian Economy just yet. He still thinks the RBA will cut rates agin in October and February.

While jobs rebounded, our labour demand index at a 5-year low still suggests a drop ahead to ~1¼% y/y; & wages remain soft amid higher unemployment. Given the RBA will “monitor …the labour market closely & adjust monetary policy if needed” – & weak hours support our Q2 GDP forecast of 0.5% (1.4% y/y), below mkt (0.6%) & RBA (¾%) – we still expect rate cuts in Oct & Feb, with trade wars raising the risk of more.

Updated

Traders in Tokyo are back from their lunch and the Nikkei is on the slide. It’s down 1.55% to 20,333. The Hang Seng has slipped as well and is up just 0.03%.

And London is now on course to slide into the red when it opens this morning. And the Dax30 in Frankfurt. The Dow is still on the dancefloor though and looking at a modest bounce of 30 points or 0.13%.

Summary

I’m taking a quick break so here are the main developments so far today:

A stock board showing a wall of red in Tokyo.
A stock board showing a wall of red in Tokyo. Photograph: Eugene Hoshiko/AP
  • Asian stocks have fallen on Thursday – and recovered a bit after the bloodbath on Wall Street overnight.
  • The Nikkei was down 1.2% in the morning session but the Hang Seng is up 0.5% after a weak start. Shanghai is down 0.75%.
  • Not so good in Australia where the ASX200 is off 2.23% despite some encouraging employment figures.
  • Oil has continued to tumble. Brent crude was down 37c, or 0.6%, at $59.11 a barrel by 0300 GMT.
  • The yield on 30-year US treasuries has fallen below 2% for the first time ever in another sign that interest rates are set to remain lower for longer.
  • Analysts have pushed back a bit on fears that the inverted US bond yield curve seen on Wednesday – and which sparked the 800-point fall in the Dow – is as crucial as some believe.
  • Futures trade points to a positive start in London and in New York later today.

Updated

One factor in the pickup in Asian shares could be a reassessment of the risks of the celebrated inverted bond yield curve.

Several analysts and experts, including the former Federal Reserve bosses Alan Greenspan and Janet Yellen, have pointed out that structural market change means that the inverted yield curve might not be as important or reliable as it once was.

Kerry Craig, a global markets strategist at JP Morgan Asset Management, told Reuters that investors should also take note of how significantly markets had changed in the last decade, which meant a yield curve inversion might not be the harbinger it once was.

Yield curve inversion is flashing a warning sign – investors should check their portfolios are resilient. But it’s not a reason to panic or to lean into the sell-off.

David Bassanese of Betashares in Sydney points out that:

Current yield curve inversion is unusual compared to history as it’s not associated with a high real Fed funds rate (average of past 5 recession episodes 3.2%). Currently the real rate is around zero. That either means the curve is providing a false signal (due to a structural flattening) or the “neutral” real Fed funds rate has fallen a lot and even a near-zero level (as at present) is restricting the economy. The latter is clearly US President Trump’s claim. My view is that the yield curve is structurally flatter and not providing a signal of recession... as confirmed by still positive indicators such as US jobless claims.

And Stephen Koukoulas, the independent Australian economist, thinks it’s all a bit of “blabber” that a sharp cut in interest rates won’t fix. As he observes, that puts him in the same camp as Trump.

Updated

Hong Kong is back in the black

The Hang Seng index has climbed into positive territory. It is now up 0.5% at 25,430 points. Losses on the Shanghai Composite are just -o.5%. What a time to be alive.

Analysts at UBS in Sydney have given up on a near-term resolution of the US-China trade war and have downgraded their forecasts for the two big economies. It also means a downgrade for industrial commodities such as iron ore and coal, and a boost for gold.

Here they are:

Our investment thesis heading into the back half of 2019 was predicated on a resolution to the trade war, but unfortunately this appears to have been short lived. As a result of increased tariffs, albeit somewhat delayed, this has lead to our economists downgrading US and Chinese growth for H2 19 and 2020. In light of this we have downgraded our industrial commodity forecasts and lifted gold.

On the bright side (if that’s the way you see it), the weakness makes another round of Chinese stimulus more likely. It’s the old “bad news is good news” paradigm, folks:

Continuing trade tensions are a headwind to global growth, but could prove positive for China stimulus.

Updated

House prices rose 0.6% in China last month, the 51st consecutive month of gains, according to Reuters calculations based on national bureau of statistics (NBS) data released today.

The gains are good news for the Chinese economy after some terrible data yesterday which showed industrial production falling to a 17-year low.

Despite all the gloom, the markets are beginning to recover some ground. The Nikkei is now off just 1.3% compared with 2% earlier, and the Hang Seng is in the red by just 0.45% after hitting -1.4% earlier. Shanghai is still on -1%.

In line with that improvement the FTSE100 and the Dow Jones are both seen opening in the black later today, according to IG Markets futures trading.

Australia is looking more off colour, however, with the ASX200 in Sydney slipping -2.28% to 6,445 points. It wasn’t long ago that it reached an all-time high of 6,875 points.

The ASX has dropped sharply on Thursday.
The ASX has dropped sharply on Thursday. Photograph: Steven Saphore/EPA

Australia at risk from global turmoil, bank deputy says

Guy Debelle, the deputy governor of the Reserve Bank of Australia, has given a speech this morning about what the global turmoil means for Australia and, not surprisingly, it’s not good news.

Reserve Bank of Australia deputy governor Guy Debelle
Reserve Bank of Australia deputy governor Guy Debelle. Photograph: David Moir/AAP

Speaking at a risk conference in Sydney, he said Australia – which has not had a recession for 28 years – benefited greatly from the “rules-based global order”. But the threats to that from the US-China trade war were bad news for the economy.

There were risks for household consumption but signs that house price falls were levelling out provided more optimism.

If this is the case, the drag from declining wealth and turnover will dissipate. Housing market conditions may even start to support consumption growth again in the period ahead.

Updated

US 30-year bond yields sink below 2% for first time

It’s all happening now!

The yield on 30-year US treasury bonds has slumped below 2% for the first time this morning. The 30-year yield extended its sharp overnight slide and hit a record low 1.991% in Asian trade on Thursday.

Concerns about the global economy is driving investors into the relative safe haven of government bonds. That drives up the price of bonds but reduces the yield.

Updated

Shanghai Composite down 1.3%

Trading has started in mainland China as well and the Shanghai Composite is off 1.1%, easing earlier losses.

It follows the decision by the People’s Bank of China to set the yuan slightly higher this morning. It also announced that it was lending 400bn yuan ($56.90bn) to financial institutions via its one-year medium-term lending facility, with an unchanged interest rate at 3.3%. It rolls over a bunch of loans worth 383bn yuan and adds more cash, Reuters reports.

The bank also injected a net 30bn yuan into money markets on Thursday.

Updated

Australian unemployment stays at 5.2%, Aussie dollar spikes

Unemployment stayed at 5.2% in July, according to seasonally adjusted figures from the Australian Bureau of Statistics released a few minutes ago. But the market was cheered by stats that showed 41,000 jobs were created last month against a forecast of 14,000.

The Aussie dollar picked up 0.4% to US67.75c.

Hong Kong opens down 1.4%

The Hang Seng index has opened down 1.4% this morning. That’s a fall of 365 points today and it takes the index below 25,000 to 24,945.

The Hang Seng been battered by concerns about the growing political crisis in the city – the deepening fears about a slowdown in the Chinese economy won’t help.

Help is at hand though. Donald Trump is offering a trade deal to Xi Jinping if he can sort the mess in Hong Kong “humanely”.

Updated

China sets yuan slightly higher

China’s central bank has set the yuan higher this morning at 7.0268 against the US dollar, compared with 7.0312 the day before.

In other words, Beijing is willing to see the yuan strengthen a little. (The lower the number, the stronger it is against the greenback). In the grand scheme of things that will be seen as a small olive branch to Washington, which last week accused Beijing of wanting to manipulate the yuan downwards and force cheaper goods on the world.

Updated

The losses seem to be easing in Japan, where the Nikkei is now down 1.76% for the day. But Australia’s ASX200 is now off a hefty 2.1%, not helped by a bad result for the telco Telstra.

It has reported a 40% fall in profits this morning thanks to the mounting cost of rolling out the country’s national broadband network, or NBN. Its shares are down nearly 2% and, as one of the biggest companies on the market, that makes a difference.

Updated

Oil continues to fall

The cocktail of economic news and data has been bad for the price of oil. Brent crude is down 39 cents, or 0.7%, at $59.09 a barrel this morning, after falling 3% in the last session.

US crude was down 28 cents, or 0.5%, at $54.95 a barrel, having dropped 3.3% in the previous session.

The falls have increased expectations that Saudi Arabi and other Opec oil-producing nations will cut production to force prices back up. That’s bad for their national coffers though and the Saudis, who are fighting a war in Yemen, have been reluctant to cut.

Michael McCarthy, chief market strategist at CMC Markets in Sydney, notes that although the bond market was the trigger for the trauma on stock markets in the past 24 hours, not every inversion in the US curve has led to a recession. But he says that might not be enough to prevent a rush for the exits amid a delicate geopolitical position:

Markets were in no mood for subtlety, and the damaging moves may provide their own rationale for more selling. The sell-off comes despite a better than forecast US earnings season. More than 90% of SPX500 companies have reported. Aggregate earnings are up around 2%, beating forecasts of a negative quarter.

He also said poor earnings result in Australia, especially from the telco giant Telstra, would keep the pressure on stocks down under:

Australian company results could add to market pressures. Telstra reported a 40% drop in profit, worse than forecast. Optimistic messages around the introduction of the 5G spectrum may not be enough to stem investor displeasure. Other misses include Blackmore’s, Cleanaway, Treasury Wine Estates and Super Retail. Both Sydney Airports and QBE Insurance delivered earnings above expectations, and funeral group Invocare surprised with a 7.5% lift.

Updated

So what is an inverted bond yield curve?

A major factor in yesterday’s selloff was the inverted US bond yield curve – not helped by recession warnings from Germany and China. It is a very reliable predictor of recession and preceded all six of the previous US recessions.

It’s not often it becomes a topic for everyday conversation. So in case you get stuck next to the water cooler and feel like making some small talk, here’s a quick explainer.

In normal times, investors would expect a higher return, or yield, for buying longer-term government bonds. Conversely, the shorter-term bonds, such as two-year bonds, give you less return.

But as you can see in the theoretical chart below, the normal curve turns the other way, or inverts, when the yield on longer-term notes falls in relation to shorter-term. It indicates that investors see trouble ahead ...

A graph showing inverted and normal bond yields
A graph showing inverted and normal bond yields. Photograph: Osborne Partners

It looks more like this in the real world:

You can go for the PhD level with this column from our economics editor, Larry Elliott:

Updated

In Japan the Nikkei index is down 2.1% this morning. Stocks are suffering amid the fears of a global downturn but are also being pushed down because the value of the yen is rising. The Japanese currency is a “safe haven” asset and goes up in times of crisis – rather like gold and the Swiss franc which are both also up today.

A higher yen is bad news for Japan’s export-reliant big manugfacturers, hence the falling stock market.

Here’s Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo:

When volatility rises, dollar/yen becomes strongly correlated with [US] treasury yields, so the currency pair has more room to fall. I expect other safe havens to rise. The mood is downbeat, because of the trade war and bad economic data.

'Turbulence will continue,' Australian stock market boss says

Market turbulence will continue over coming months, the chief executive of the Australian Stock Exchange says.

As the benchmark ASX200 took a 2% hit in early trading this morning, the ASX chief executive, Dominic Stevens, said the 2020 financial year would see “elevated volatility” because of the geopolitical situation and the changing expectations for interest rates.

My colleague Ben Butler writes that with rates at record lows the market expects further cuts in coming months as the Reserve Bank tries to boost Australia’s sluggish economic growth.

But while markets around the world may be melting down, it’s been a good year for the ASX. It said this morning that profits after tax had risen 10.5% in the year to 30 June, to $492m. Shareholders in the market operator will reap the benefits, trousering dividends for the year totalling 228.7c a share – up 5.7% on last year’s payout – plus a special dividend of 129.1c a share from the sale of ASX’s stake in technology company Iress.

Updated

Australia opens down 1.8%, Japan off 1.9%

Trading has started in Asia with steep falls – as expected – in Australia and Japan.

Good morning/evening ... wherever you are in the world, welcome to the Guardian’s business live blog which is starting early today before what’s expected to be a turbulent day on the financial markets.

My colleague Graeme Wearden covered all the action in the UK, Europe and the US on Wednesday and you can catch up on his blog here.

But in the meantime here are the main points:

  • Wall Street suffered huge losses after an inversion in the US bond yield curve sparked fears of an imminent recession.
  • The Dow Jones plunged 800 points, or 3%, its fourth largest decline in history. The S&P500 and Nasdaq were also down heavily.
  • Fears were compounded by GDP figures in Germany pointing to a recession there and data in China showing industrial production was down 17% in July.
  • The numbers sent European markets down, with the FTSE100 off more than 100 points.
  • Oil slumped on fears of a global downturn.
  • Donald Trump lashed out at the Fed chairman, Jerome Powell, calling him “clueless”.

Here’s our news wrap of yesterday – and I’ll have today’s opening scores in a few minutes when trading starts in Sydney.

Updated

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