Global stock markets slump as growth fears trump trade joy

Stock markets on both sides of the Atlantic saw hefty losses on Wednesday, gripped by fears for the global economy only a day after enthusiasm over possible detente in an ongoing US-China trade war had given them a dizzying lift.

A German GDP contraction in the second quarter, weak Chinese industrial output and an inversion of the US yield curve all seemed to cement fears of a global slowdown.

“The joyous reaction in the markets to the news that the US would delay increasing tariffs on some Chinese consumer products appears to have been short-lived,” said David Cheetham at XTB.

Eurozone indices were around two per cent down by the mid-afternoon, while on Wall Street the Dow Jones index lost nearly 400 points at the New York opening bell.

At 11:07am, the Dow Jones Industrial Average was down 557.26 points, or 2.12%, at 25,722.65, the S&P 500 was down 62.63 points, or 2.14%, at 2,863.69. The Nasdaq Composite was down 190.71 points, or 2.38%, at 7,825.65.

Ten of the 11 major S&P sectors were in the red, with the energy sector’s 3.4% drop leading the decliners.

Shares of Apple Inc were down 2.1% after boosting markets a day earlier with a 4% rise. Chipmakers were also down, with the Philadelphia chip index slumping 3%.

The biggest decliner on the S&P 500 index was Macy’s Inc , down 15.9%, after the department store operator cut its full-year profit forecast as it discounted heavily to clear excess spring season inventory.

Rivals Kohl’s Corp, Target Corp and Nordstrom Inc slipped between 2.7% and 10.8%.

Declining issues outnumbered advancers for a 4.45-to-1 ratio on the NYSE and for a 4.90-to-1 ratio on the Nasdaq.

The yield on the 10-year US Treasury bond, meanwhile, briefly slid below the yield on two-year debt Wednesday, a rare phenomenon that has often been a harbinger of recession.

Bond yields have gyrated in recent weeks, with analysts warning that sinking rates are a sign of a worsening medium-term and near-term economic outlook. US import prices unexpectedly rose in July, but the underlying trend continued to be weak, pointing to subdued imported inflation pressures.

The report from the Labor Department on Wednesday suggested inflation could remain moderate despite a broad increase in consumer prices in July, which could allow the Federal Reserve to cut interest rate further to limit the economic damage from the U.S.-China trade war.

XTB’s Cheetham noted, however, that stocks were not usually in immediate trouble from bond yield inversions.

Whenever yields inverted in the past 60 years, it took US stocks at least three months, and on sometimes even 22 months, before they peaked, he said.

European and US stocks had risen across the board on Tuesday on news that the United States had delayed tariffs on a swathe of Chinese goods easing tensions in their bitter trade war, an upward trend that was mirrored by Asian stocks Wednesday.

Shanghai managed to end with a gain of 0.4 per cent despite data showing Chinese factory output expanded last month at its slowest pace in 17 years.

But in European trading, Frankfurt slumped after data showed Germany’s economy contracted in the second quarter, highlighting its vulnerability to trade tensions and stoking debate on higher government spending.

Shrinkage of 0.1 per cent meant the eurozone’s largest economy lost significant momentum compared with the 0.4 per cent growth seen in January-March.

Germany actually lagged Italy’s standstill economy − and France which posted 0.2 per cent growth.

Milan’s stocks index meanwhile tumbled by more than two per cent, a reflection of Italy navigating a political crisis.

“The lift (for stock markets) gained from Tuesday’s trade war twist... failed to carry over to Wednesday − the mood undermined by weak data from both China and Germany,” said Connor Campbell, analyst at Spreadex trading group.

The dollar was down against main rivals, with sterling rising after official data showed UK annual inflation rose unexpectedly to 2.1 per cent in July from 2.0 per cent the previous month.

Tuesday’s trade war development had provided some much-needed respite for investors, under intense pressure from a range of issues including protests in Hong Kong and Brexit.

Oil prices retreated having surged Tuesday on the tariffs news.

US President Donald Trump said top-level negotiators for Washington and Beijing had held “very productive” talks by phone.

Trump said the decision was made to protect consumers heading into the holiday shopping season, with 10 per cent levies on electronics goods − which were due on September 1 − put off until December 15.

“Markets... rallied hard on the notion of Trump blinking, but overall a high degree of scepticism should remain and an imminent deal is unlikely given Trump has foreshadowed he is going to be campaigning hard on the issue in the 2020 election,” cautioned National Australia Bank analyst Tapas Strickland.

Agencies