The threat of a recession no longer seems so remote for investors in financial markets.
The Treasury's 10-year performance closely followed fell so low on Wednesday that, for the first time since 2007, it briefly exceeded a threshold that correctly predicted many past recessions. Weak economic data from Germany and China added to recent signs of a global slowdown.
This frightened investors, who responded by dumping the stocks, sending the Dow Jones Industrial Average to an 800-point slip, its biggest drop in the year and the fourth-largest daily spot drop recorded.
The S&P 500 index fell by almost 3% as the market canceled all its gains from a demonstration the day before. The shares and technology banks have driven the large sell-off. Retailers suffered particularly heavy selling pressure after Macy published a dismal earnings report and cut forecasts for the entire year.
Investors have invested money in the security of US government bonds for months, in a climate of growing anxiety that the weakness of the global economy could weaken growth in the United States. The uncertainty about the outcome of the US trade war with China stimulated a return of stock market volatility in August: the Dow fell by more than 5% and the S&P 500 is fell by over 4%.
Economic data from two of the world's largest economies added Wednesday to investor fears. European markets collapsed after the German economy contracted by 0.1 percent in the spring due to global trade war and problems in the automotive sector. In China, the second world economy, the growth of industrial production, retail spending and investments weakened in July.
"The bad news for global economies is accumulating much faster than most economists thought, so trying to keep up is exhausting," wrote Kevin Giddis, head of Raymond James' fixed-income capital markets, in a relationship.
The S&P 500 index fell by 85.72 points, or 2.9%, to 2,840.60. The Dow sank 800.49 points, or 3 percent, to 25.479,42. The Nasdaq composite lost 242.42 points, or 3%, to 7,773.94. The Russell 2000 stock index of smaller companies has slipped by 43.05 points, or 2.8 percent, to 1,467.52.
The Australian stock market should follow Wall Street with strong falls. The SPI200 futures contract fell by 131 points, equal to 2.00 per cent, to 6,404.0 at 7 am, suggesting an early collapse for the S & P / ASX200 benchmark on Thursday. On Wednesday, the Australian dollar is buying 67.47 cents from 67.82 US cents.
Losses come a day after the stock rally when the Trump administration has delayed tariffs by about $ 160 billion of Chinese goods that were supposed to come into effect on September 1st.
President Donald Trump has taken Twitter to defend his trade policy on Wednesday, saying "we are winning big, against China".
But many on Wall Street remain concerned that the trade war between the two largest economies of the world could drag on through the US 2020 elections and cause more economic damage. "We still see a substantial risk that the trade dispute will escalate further," said Mark Haefele, global chief investment officer at the UBS investment bank in a note to clients.
Trump also criticized the Federal Reserve for hindering the US economy by raising rates "too fast too" last year and not reversing its policy quite aggressively – the Fed reduced the rate key of a quarter point last month.
"Companies and jobs are fleeing. The prices for us have not increased and, in some cases, have fallen. China is not our problem, although Hong Kong does not help us. Our problem is with the Fed. Relieved too much and too fast. Now it's too slow to cut, "Trump said.
"Spreading is too much, as other countries say, thanks to Jay Powell and the Federal Reserve. Germany and many others are playing! CRAZY REVERSE REVENUE CURVE! We should easily reap big rewards and gains, but the Fed is holding us back. We will win!"
WHAT IS THE RETURN CURVE?
Traders tend to pour money into ultra-safe US government bonds when they fear an economic slowdown and this makes yields lower.
When longer-term Treasuries fall below short-term ones, economists call it a "reversed yield curve". A reversed curve suggests that bond investors expect growth to slow down so much that the Federal Reserve will soon feel forced to cut short-term rates to try to sustain the economy.
In short, it is a sign of economic pessimism.
The 10-year Treasury yield fell from 2.02 percent on 31 July to less than 1.60 percent and Wednesday fell briefly below Treasury yield to two years for the first time since 2007.
Each of the last five times when two and ten year Treasury yields reversed, a recession followed. The average time is about 22 months, according to Giddis by Raymond James.
The indicator is not perfect, however, and has given false signals in the past. After its initial decline, the ten-year Treasury yield stood at 1.58 percent, even with the two-year return. Meanwhile, even 30-year Treasury yields hit a record low on Wednesday.
Other parts of the yield curve have already been reversed, starting from the end of last year. But each time, some market observers have warned them not to do too much. Some argue that the yield curve could be a less reliable indicator this time because technical factors could distort longer-term returns, such as negative bond yields abroad and Federal Reserve positions of $ 3.8 trillion of dollars in Treasurys and other investments in its balance sheet.
With the decline in bond yields, the banks suffered heavy losses on Wednesday. The lower bond yields are negative for the banks because they force to reduce the interest rates on mortgages and other loans, which translates into lower profits for the banks. Citigroup sank 5.3 percent and Bank of America gave up 4.7 percent.
Macy fell 13.2 percent, the biggest loss in the S&P 500, after cutting profit forecasts for the year. The retailer's profit for the last quarter was much lower than analysts' forecasts as it was forced to cut the prices of unsold goods. Macy's sad results have also pushed other retailers down sharply. Nordstrom sank 10.6 percent and Kohl fell 11 percent.
Energy stocks have also fallen sharply, hit by another drop in the price of crude oil due to concerns that a weakened global economy will drag demand down. The National Oilwell Varco collapsed by 8% and Schlumberger fell by 6.6%.
The price of US crude oil fell by $ 1.87 USD, or 3.3%, to $ 55.23 a barrel. The Brent crude, the international standard, lost $ 1.81 to close at $ 59.48.
Petrol wholesale fell 6 cents to $ 1.68 per gallon. The heating oil fell 4 cents to $ 1.84 per gallon. Natural gas fell by 1 cent to $ 2.12 per 1000 cubic feet.
The gold gained from $ 13.70 to $ 1.515,90 per ounce, close to a maximum of six years. Investors also offered shares in the mining company Newmont Goldcorp at 0.8 percent.
Silver rose 29 cents to $ 17.25 USD per ounce and copper fell 3 cents to $ 2.59 USD per pound.
The dollar fell to 105.88 Japanese yen from 106.68 yen on Tuesday. The euro weakened to $ US 1,1137 from $ US 1,1174.
Overseas, the German DAX fell by 2.3 percent as a result of weak German economic data. The French CAC 40 fell by 2.2% and the FTSE 100 in London lost 1.7%. In Asia, the Japanese Nikkei 225 increased by 1%, the Kospi in South Korea gained 0.7% and the Hong Kong Hang Seng added 0.1%.