A trader on the floor at the New York Stock Exchange in New York City, New York, the US, on December 4 2018. Picture: REUTERS/BRENDAN MCDERMID
A trader on the floor at the New York Stock Exchange in New York City, New York, the US, on December 4 2018. Picture: REUTERS/BRENDAN MCDERMID

London — World stocks tumbled to one-week lows on Wednesday, as declines by long-dated US bond yields and a renewal of trade concerns stoked fears of a downturn in the world’s biggest economy, the US.

US markets are shut to mark former president George HW Bush’s death, but the effect of Wall Street’s turmoil in the previous session, when New York-listed shares tumbled more than 3%, is being felt in Asia and Europe.

That pushed MSCI’s all-country index down almost 0.5%.

The declines came just a day after an equity surge driven by optimism that China and the US would sort out their trade dispute. Then President Donald Trump threatened “major tariffs” on Chinese imports if his administration failed to reach an effective trade deal with Beijing.

“As I look into next year, most expectations for further gains have been pared back. Investors have gone from extended bullishness at the start of the year on equities to an uncomfortable neutrality,” said Paul O'Connor, head of multi-asset at Janus Henderson.

Trump’s comments, alongside the drop in US stocks and bond yields, took Asian shares outside Japan 1.5% lower. Shanghai markets fell 0.6%, their losses limited by Chinese officials expressing confidence that a trade deal would be clinched on time.

European markets opened lower, with a pan-European index down 1.2%. Losses were led by a 1.6% decline in bank shares, which are being pummelled by the latest declines in long-dated government bond yields.

The moves follow similar declines in US bank shares, which dropped 4.4% on Tuesday.

Global equities have been shaken by fears of a recession, fanned by the flattening US treasury yield curve — a phenomenon in which longer-dated debt yields fall faster than their shorter-dated counterparts.

Such an inversion of two-year and 10-year yields, when 10-year bonds yield less than their two-year debt, has preceded every US recession in the past 50 years.

“The market decline in the US overnight and the flattening of the yield curve reflect that economic growth momentum is taking over as the primary concern for investors,” Tai Hui, a strategist at JP Morgan Asset Management told clients.

So far, 10-year yields are clinging to an 11-basis-point margin over the two-year, although it was the smallest one in more than a decade.

The flattening of the curve gained momentum after last week’s signal by the Federal Reserve that it may be nearing an end to its three-year rate-increase cycle. It has spread to the eurozone, where the German two- to 10-year yield curve is at its flattest since mid-2017 at 85.70 basis points.

German 10-year yields slipped to six-month lows of 0.247%.

“There has been a huge flight to safety in the European bond market … [European] equities closed on Tuesday only modestly lower while there were sharp falls in the US,” Martin van Vliet, senior rates strategist at ING, said. “The European bond market was already preparing for trouble ahead.”

Markets are also bracing for more news on the Brexit front. British Prime Minister Theresa May suffered embarrassing defeats one Tuesday, the start of five days of parliamentary debate over her plans to leave the EU.

The pound touched 17-month lows of $1.2659 on Tuesday, then recovered to trade around $1.2734 on Wednesday, flat for the day.

The dollar has been undermined by the bond market moves and recession fears, but it has recovered from two-week lows against a basket of currencies to trade around 97, also flat on the day.

It rose 0.2% to ¥113 after losing 0.75% the previous day against the safe-haven Japanese currency.

The threat of slowing economic activity also weighed on oil prices. Brent futures shed more than one percent to $61.4 a barrel.

Reuters