U.S. Shares fell open Wednesday after the reversed yield curve, one of the most reliable indicators of a recession, triggered a new wave of investor fears and erased the short-term shock from Tuesday's trading easing.
For the first time since 2007, the return on short-term US bonds lost the return on long-term bonds. This phenomenon, which suggests that investors' faith in the economy is faltering, has preceded every recession over the past 50 years. It's not a sure thing, but it is one of the more reliable signs that something is wrong in the economy. Recessions usually come within 18 to 24 months after the yield curve is inverted, according to research from Credit Suisse.
“The three-month treasury to the 10-year banknote curve has been reversed for several weeks now and with the inversion of the 2-year to 10-year curve. The stars are in line across the curve for the economy heading for a major fall, says Chris Rupkey, CFO of MUFG Union Bank. "The yield curve cries lumber that a recession is almost a reality, and investors are stumbling over themselves to get out of the way."
A fall in the closely monitored 10-year US Treasury bond is an indication that investors are moving away from risk and against the security of long-term bonds. Interest rates fall as bond prices rise. Some European countries have negative bond yields. That means people are paying authorities to keep their money for them. Historically, people buy government bonds and expect interest payments on these bonds as a reward for lending government money.
The warning sign gave a new blow to the markets at a time of year that is already notoriously tough for stocks. The Dow Jones industrial average hit nearly 400 points on Wednesday, a day after it achieved its best performance in two months. Standard & Poor's 500 index was more than 1.4 percent, and the tech-heavy Nasdaq was more than 1.6 percent. Ten of the 11 market sectors were in the loss column on Wednesday, with energy, consumer staples and financial services at the forefront.
Bank shares dropped the news. Bank of America and Citigroup saw their shares fall more than 3 percent, and JP Morgan's shares fell 2.6 percent. Gold, a safe haven for investors, rose. And the influx of investors looking for security pushed US 30-year government rates to their lowest level ever.
Darkening skies abroad gave investors more to worry about. Germany announced on Wednesday that the economy had shrunk, blaming the fallout from the fall of the US trade war and the looming threat of a hard Brexit. The European reference portfolio Stoxx 600 was down nearly 6 percent in afternoon trading.
China reported several signs of a weakening economy on Wednesday, with high unemployment and lower production and investment markers, sparking fears of a broader global slump that the protracted trade conflict appears to stop some of the world's most powerful economies.
Several factors have contributed to the market turmoil in recent sessions, including China's threat to devalue its currency, massive protests in Hong Kong that could provide a response from the Chinese government, an escalation of the US-China trade war and the flight to bonds.
The trade-roller coaster has created a sense of uncertainty among American businesses, making it more difficult for companies to make long-term plans. Uncertainty has been highlighted in stock prices. The Dow is about 5 percent of the all-time high a month ago. It has now worked against the US government bond market.
"The big concern is around trading," said Dan Ivascyn, PIMCO's chief investment officer at PIMCO. "The longer we stay in limbo, the more damage to the world economy. You already have a fragile global economy, and with this trade tension you start to see people shift to safer assets with almost complete disregard for what they earn on those assets."  The counter with financial warning signs around the world followed a rare moment of alleviating Tuesday in the U. S. China war, after The White House announced that tariffs on certain consumer goods – such as laptops, cell phones and toys – would be exposed to some months to give customers and companies a break during the Christmas shopping blitz Some of the tariffs for the remaining $ 300 billion in Chinese goods will still go into effect on September 1, as scheduled, while items covered during the delay will not be customs until 15.
"Just in case they might have an impact on people, what we have done is delayed so that they will not be relevant. or the Christmas shopping season, "President Trump told reporters Tuesday.
It was the first time Trump has publicly acknowledged that American people and businesses bear some of the burden from his tariffs.
The delay offered a glimmer of hope in an otherwise bleak vision in the US and China, and was announced after a telephone conversation between trade negotiators, which Trump hailed as productive. Chinese officials plan to come to the United States in September to continue the talks.
"The delay affects about half of $ 300 billion in imports and clearly focuses on popular consumer products that could have made the Christmas shopping season much more expensive for US consumers," Craig Erlam, an OANDA analyst, wrote in a note to investors Wednesday. "Trump's decision to protect consumers from tariffs during such an important period makes a lot of sense, but it also recognizes that 2020 can be much more expensive for them if progress is not made."
Some White House officials have become increasingly concerned. about the strength of the economy heading into the 2020 election, and they have pushed the Federal Reserve to squeeze interest rates, which they believe will free up more money to invest.
In his first two years, Trump sought economic growth through a combination of tax cuts, consumption increases, regulatory changes and low-energy costs, but many critics said the steps he took were only short-term updates that did little to solve the economy's problems. Trump has repeatedly said that the economy is now the strongest in American history, but there are many signs that this is not the case.
The government is set to spend nearly a trillion dollars more than it brings in revenue this year, unusual occurrence when unemployment is low. Parts of the manufacturing sector have shown signs of contracting in recent months, and business investment has stopped.
The stock market has become increasingly unstable, often whipsawing up or down based on news related to trade discussions between the White House and China. Trump and top advisers have stepped up pressure on the Federal Reserve to cut interest rates, a claim that former presidents have refused to put out for fear of tainting the central bank.