Concerns about the war were hampering financial markets on Wednesday as data from Germany and China showed trouble for production-dependent economies, while the bond market renewed fears of a US recession.
Stocks and commodities fell in Europe, the United States States and Asia as risk-averse investors ran against the security of government bonds, pushed bond prices sharply higher and returns – moving in the opposite direction – to low levels not seen this year.
On Wall Street, the S&P 500 fell 2.93 percent, led by a sharp decline in the energy sector. Retail shares also fell sharply after Macy posted lower quarterly results. Shares from major technology companies, which are sensitive to the outlook for the trade war, also fell. Equity standards in Europe also fell, and Thursday's Japan Nikkei index opened 1[ads1].6 percent.
The fall in the S&P 500 reflected a rapid shift in sentiment just a day after a 1.5 percent gain, which had been driven by the White House's decision to limit the scope of the next China Customs round to spare US consumers over of the holiday jump time.
But there is growing evidence that the struggle between the two largest economies of trade, technology and economic dominance has already done significant damage to the world economy.
Earlier Wednesday, the German government reported that the country's economy shrank in the quarter ending in June. The German economy, the largest eurozone, has been particularly exposed to the US-China trade war because of Germany's dependence on production and export. Another quarter in a row with a decline would mean that Germany was in a recession.
[ Read more about Germany's economy . ]
In China, a number of overnight macroeconomic indicators published showed that the economy continues to lose steam as the trade war continues. Chinese industrial output declined more than expected, falling to 4.8 percent in July, the lowest level since 2002. Investment growth and retail sales also slowed.
The economic updates led to the increasingly poor conditions in the global industrial economy. Close monitoring of the activities of industrial purchasing managers now suggests that the production economies of China, Japan, Germany and the United Kingdom – the second, third, fourth and fifth largest economies in the world – are all contracting.
And prices for key industrial commodities such as aluminum, copper and steel have fallen, confirming deep weakness in the industrial sector and shrinking the profits of the companies producing them.
Large industrial companies around the world have also reported a steady history of softening demand, emphasizing that they are taking a cautious approach to the rest of the year.
In recent weeks there has also been evidence of the global industrial decline in the company's income reports in the United States. Second-quarter profits for companies in the S&P 500 are set to decline 0.7 percent from a year earlier, according to data provider FactSet. If this figure holds – and more than 90 percent of the companies in the index have reported – it will mark the second straight quarter that revenue has gone down.
S&P's industrial sector performed poorly, with revenues falling 10 percent from last year. The performance trend was also most pronounced among the companies with the greatest exposure to the world economy and trade.
Investors were intensively set on Wednesday to turn the financial signals from the bond market. The return on long-term government securities in the United States continues to push low prices that have not been seen in recent years. The return on the 10-year Treasury benchmark index fell to 1.58 percent, a level it last reached at the end of 2016. The yield on the 30-year bond fell to 2.03 percent, the lowest level on the record.
[ Read more about the intensifying recession forecast in the bond market. ]
Bond yields are usually determined by investors' expectations of economic growth and inflation, which makes the recent downturn worrying in itself. But the fall in long-term returns also briefly pushed the return on the 10-year note below that of the two-year Treasury, an unusual situation known as an inversion of the yield curve. Investment in the yield curve is considered to be one of the most reliable leading indicators of the recession in the United States, having preceded any economic downturn over the past 60 years.
This phenomenon, when interest rates on long-term bonds fall below those that are short-term bonds, had already occurred with some government securities this year. But the inversion of two- and 10-year notes, which most recently happened in 2007 when the US economy began to plunge into a severe recession, seemed to worry investors again.
Signs of economic weakness also affected commodity markets. Copper prices, often closely linked to the prospects of Chinese economic growth, fell more than 1 percent in New York trade. US crude oil futures prices fell more than 3 percent.
The rise in crude oil prices weighed heavily on the share prices of US energy companies, pushing the energy sector down by more than 4 percent. Exxon Mobil, Chevron and ConocoPhillips all fell more than 3.5 percent.
Shares of major tech companies also weighed the markets, with Amazon dropping more than 3 percent and Apple and Microsoft more than 2.5 percent.
The recent return on market volatility has reduced the gains this year's investors have had. But these gains are still significant. The S&P 500 is still more than 13 percent in 2019.