Wall St plunges on fears of economic slowdown and US-China trade uncertainty

David Chau
Dec 05, 2018, updated Dec 05, 2018

The US bond market is pointing to a recession, as short-term (2-year) rates are starting to rise against longer-term (10-year) yields. Photo: Reuters

Wall Street suffered its biggest plunge since the October sell-off — over lingering concerns about the trade war, and the bond market signalling a potential economic slowdown.

Investors have doubts about what was actually agreed between the United States and China when they struck a 90-day truce at the G20 summit over the weekend.

Markets at 8:15am (AEDT):

ASX SPI futures -1.3pc at 5625, ASX 200 (Tuesday’s close) -1pc at 5,713
AUD: 73.36 US cents, 57.68 British pence, 64.66 Euro cents, 82.74 Japanese yen, $NZ1.06
US: Dow Jones -3.1pc at 25,027, S&P 500 -3.2pc at 2700, Nasdaq -3.8pc at 7,158
Europe: FTSE 100 -0.6pc at 7,023, DAX -1.1pc at 11,335, CAC -0.8pc at 5,013, Euro Stoxx 50 -0.8pc at 3,190
Commodities: Brent crude -0.1pc at $US61.63/barrel, spot gold +0.6pc at $US1238.06/ounce, iron ore +1.2pc at $US67.16/tonne

While US President Donald Trump boasted about “an incredible deal”, China has said very little.

A lack of detail from Beijing left investors wondering if Mr Trump’s exuberance was warranted.

The White House said China would start buying farm products from US farmers “immediately”, and a “very substantial” amount of American agricultural, energy, industrial, and other products.

In contrast, China was yet to mentioned what specific goods it would buy.

Mr Trump also tweeted that the 90-day tariff ceasefire could be extended – and if a “REAL deal” cannot be struck, then he will revert to increasing tariffs on Chinese imports.

“If it is, we will get it done,” Mr Trump said in a Twitter post. “But if not remember, I am a Tariff Man.

“When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so.”

….I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN

— Donald J. Trump (@realDonaldTrump) December 4, 2018

The Dow Jones index plummeted by almost 800 points, or 3.1 per cent, to 25,027 at 4.15pm (local time).

The benchmark S&P 500 lost 3.2 per cent to 2700.

Meanwhile, the tech-heavy Nasdaq index tumbled by 3.8 per cent to 7158.

US recession fears

Also dragging down Wall Street, particularly its banking stocks, were fears of an economic slowdown, as signalled by the US Treasury bond market.

The yield for short-term bonds (two years) rose to 2.81 per cent — surpassing what investors could get from longer-term bonds (five years), which pay a 2.79-per-cent yield.

Normally, long-term rates are supposed to be higher to reflect expectations of continued economic growth.

But when the yield curve “inverts”, as it has now done, it is traditionally an indicator of an economic slowdown.

“Historically there is a good correlation between the yield curve inverting and the timing of the next recession and the bond market has been a big focus for today,” Binky Chadha, the chief strategist at Deutsche Bank, said.

The focus now is on the narrowing spread between the two-year (2.81pc) and 10-year yields (2.91pc).

The spread, between the two and 10-year yields, is currently at its narrowest in more than a decade, and its inversion has preceded the past three US recessions.