US stocks recovered and curtailed a rally in government bonds on Wednesday as investors pushed back against deepening concerns over global growth, after a trio of central banks slashed interest rates and fresh warning signs emerged over the health of the German economy.
The broader US stock market was down marginally in afternoon trade, fighting back from a drop of about 2 per cent soon after opening bell. In Dublin, the Iseq finished 0.6 per cent weaker, with financial stocks suffering most. The market interest rate, or yield, on Ireland’s 10-year Government bonds fall into negative territory for the entire session.
German 10-year bund yields, already well below zero, reversed an earlier decline to be up 1 basis point at minus 0.577 per cent, while UK 10-year gilts fell as much as 8.4bp to touch a fresh record low of 0.431 per cent.
Other European stock markets also managed to claw back earlier declines, despite fears of recession in Germany.
Industrial production in Germany dropped by a larger-than-expected 1.5 per cent month-on-month in June, compounding fears that Europe’s largest economy could be heading for its first recession in more than six years.
Output
Analysts polled by Reuters had estimated output would fall 0.4 per cent during the month compared with May. The fall meant that industrial production was 5.2 per cent lower than a year ago, Germany’s statistics office said.
Carsten Brzeski, ING’s chief economist for Germany, characterised the figures as “devastating, with no silver lining”.
After a brief slowdown last year, the German economy rebounded in the first three months of 2019. But many economists, including those at the Bundesbank, Germany's central bank, are predicting that next week's GDP figures will show that the economy shrank again in the three months to June.
Meanwhile, a rally in US treasuries, or bonds, which have benefited both from expectations of looser monetary policy and their “haven” appeal, cooled.
If trade tensions keep escalating, bond markets may move in that direction faster than many investors think
The moves came as central banks in India, New Zealand and Thailand signalled worries over a slowing global economy by cutting interest rates by more than expected.
Joachim Fels, global economic adviser at bond manager Pimco, said Treasuries could go negative when the world economy next enters a prolonged slump. “If trade tensions keep escalating, bond markets may move in that direction faster than many investors think,” he said.
Riskier assets
The overall move into bonds and away from riskier assets comes amid a wave of action from central banks.
The Reserve Bank of India cut rates by 35bp, a bigger move than had been expected, New Zealand's central bank aggressively cut its benchmark policy rate to a fresh all-time low, prompting the local currency to fall sharply, and the Thai central bank unexpectedly cut rates.
“These aren’t even terrible economies. Not like, say, Germany,” said Kit Juckes, a macro strategist at Société Générale, referencing the German industrial production data.
– Copyright The Financial Times Limited 2019
