Investors seek safety in bonds on fears over economic outlook

Wall Street opened the day in sell-off mode, a familiar theme in August. — Reuters pic
Wall Street opened the day in sell-off mode, a familiar theme in August. — Reuters pic

NEW YORK, Aug 8 — Plunging bond yields jolted global markets yesterday as interest rate cuts by three central banks and grim German economic data underscored worries about a weakening global economy amid the protracted US-China trade war.

Wall Street opened the day in sell-off mode, a familiar theme in August as the US and China have announced new measures targeting each other.  

But after a bruising start, US stocks gradually pushed higher throughout the day while Treasury yields recovered from their lows. Two of the three major Wall Street indices finished in positive territory.

Decisions by more central banks to cut interest rates and weak German industrial data “reminded investors that economic growth in several other regions of the world remain at risk as the US and China trade dispute drags on,” said CFRA strategist Lindsey Bell in a note.

“While uncertainty is driving upside in defensive asset classes, we don’t think stocks should be abandoned at this time. A near-term recession is unlikely.”

Still, most banks were under pressure, with Italy’s UniCredit and Germany’s Comemrzbank both sharply lower following warnings on the hit from lower interest rates. Large US banks such as JPMorgan Chase and Wells Fargo also lost more than two per cent.

Bond prices rise as more investors seek safe investments, and that pushes their yield or return lower. The benchmark US government 10-year note dropped to multi-year lows, while French and German bond yields, already in negative territory, set new record lows. 

“Nobody wants to be vulnerable, everybody is in risk aversion mode, and all ingredients are in place to push yields lower,” Aurelien Buffault, bond manager at Meeschaert, told AFP.

‘Rates falling everywhere’

Markets now believe that the world’s key central banks will cut interest rates further to stave off, or at least alleviate, any coming recession, analysts said.

“Rates falling everywhere,” analysts at Moneycorp said.

“They may not exactly be competing but the world’s central banks all seem to be pointing in the same direction towards lower rates. In every case there is concern, to a greater or lesser degree, about the global economy.”

Commodity markets also followed the logic of economic worry, with safe-haven investment gold surging and oil, the fuel of economic growth, falling.

Gold went above US$1,500 (RM6,284) per ounce for the first time since 2013.

Oil extended already steep weakness after the US Department of Energy reported a surprise increase in inventories — a sign of flagging demand.

European stocks had a rollercoaster session which started on an upbeat note but then turned sour when US stocks fell sharply at the New York opening bell as “escalated US-China trade concerns continuing to weigh on sentiment,” Charles Schwab analysts said.

But as Wall Street came off its morning lows, European equities regained their poise to close mostly higher.

Key figures around 2040 GMT

New York - Dow: DOWN 0.1 per cent at 26,007.07 (close)

New York - S&P 500: UP 0.1 per cent at 2,883.98 (close)

New York - Nasdaq: UP 0.4 per cent at 7,862.83 (close)

London - FTSE 100: UP 0.4 per cent at 7,198.70 (close)

Frankfurt - DAX 30: UP 0.7 per cent at 11,650.15 (close)

Paris - CAC 40: UP 0.6 per cent at 5,266.51 (close)

EURO STOXX 50: UP 0.6 per cent at 3,309.99 (close)

Tokyo - Nikkei 225: DOWN 0.3 per cent at 20,516.56 (close)

Hong Kong - Hang Seng: UP 0.1 per cent at 25,997.03 (close)

Shanghai - Composite: DOWN 0.3 per cent at 2,768.68 (close)

Pound/dollar: DOWN at US$1.2140 from US$1.2171 at 2100 GMT

Euro/pound: UP at 92.26 pence from 92.01 pence 

Euro/dollar: UP at US$1.1203 from US$1.1199

Dollar/yen: DOWN at ¥106.23 from ¥106.47

Brent North Sea crude: DOWN 4.6 per cent at US$56.23 per barrel

West Texas Intermediate: DOWN 4.7 per cent at US$51.09 per barrel — AFP

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