Stocks swoon on growth concerns as US yield curve inverts

Summary:

• Wall Street slides as yield curve inverts

• Nike dips to 1-month low

• German manufacturing tanks to lowest since Aug 2012

• Euro also swoons in response

• GBP recovers as EU offers two conditional Brexit delays

The final US session of the week has gotten off on the wrong foot with a wave of selling hitting stocks from the opening bell with the Dow (US30 on xStation) sliding more than 350 points. Jitters over the global economy following the disastrous manufacturing data from the Eurozone this morning are understandable, and after a couple of topsy-turvy days how the markets trade into the weekend could be telling. The yield on a 3-month Treasury bill has risen to 2.467% this afternoon, while the 10year note yield has fallen nearly 10 basis points to 2.444%, which means the 3-month/10-year yield spread has turned negative or inverted. This is the first time the yield curve at these points has inverted since 2007 and is seen by some as a key predictor of economic downturns and recessions.

One of the bigger fallers this afternoon is Nike, with shares in the sportswear giant tumbling almost 5% after it reported disappointing sales growth in North America. On the face of it the results were decent, with earnings per share (EPS) beating the street and revenue coming in inline. This market has been one of the leading lights in the market recovery seen from the Q4 2018 rout, breaking up to a record high at the start of the week. The 61.8% fib at 78.55 where price broke up from in mid January could be an area of interest if the declines persist.

A series of worse than expected economic releases from Europe have sounded the alarm bell not just for the bloc, but also the global economy, by providing further evidence of a worldwide slowdown in activity. These industry surveys are keenly followed, and unlike employment or GDP figures they are commonly seen as leading indicators due to the nature of their composition which is heavily weighted to future expectations.

Due to the country’s large level of exports, German manufacturing is often seen as a bellwether of global economic activity and with this metric falling to its lowest level since August 2012, and in doing so chalking up a 3rd consecutive month in contraction territory with another PMI reading below 50 it’s sending a clear and obvious warning sign on the health of the global economy. The German stock market tumbled on the release, with the Dax30 promptly shedding some 150 points in the initial reaction and after rising to its highest level since October on Tuesday, the market is now in danger of breaking down after a strong run higher of late.

The data has also weighed on the single currency, with the Euro pulling back and the EURUSD moving back below $1.13. This pair now trades beneath where it was ahead of the Fed and the market is back under pressure after soaring higher on Wednesday evening. Elsewhere there’s been a notable move lower in the Turkish Lira as the Turkish Central Bank CBRT suspends 1-week Lira REPO auctions. On the face of it this should be Lira positive but perhaps the fact the bank feel the need to do this reveals deeper concerns about trying to prop up the currency. USDTRY is higher by 3.6% at the time of writing.

There’s been some decent gains seen in the pound today, after the latest events from Brussels have seen fears of a no-deal Brexit subside somewhat, thanks to the offer of two separate extensions to the deadline which decreases the chances of an accidental  no-deal at the end of next week. It’s not been a great week for the pound overall though and the ongoing uncertainty does seem to be taking its toll on the currency which has held up surprisingly well in the past month despite the ongoing political turmoil. Next week, we’ll likely get another so-called meaningful vote on Theresa May’s deal, which will likely be rejected again and then a series of indicative votes will hopefully shed some light on what MPs would back, with parliament so far just saying what they don’t want.