Are the bears here to stay? The rush into government bonds accelerated on Wednesday. Yields on 30-year U.S. Treasuries and 10-year German bunds reached record lows of 1.905 percent and minus 0.716 percent, the entire Finnish yield curve turned negative and the U.S. 2-10 curve stayed inverted.
Yields are off those lows this morning, but Wall Street is indicated to open lower. A pan-Asian equity index excluding Japan fell 0.3%. Chinese and Korean shares tumbled 0.4% and Europe is opening weaker again. Safe havens are in demand – bonds aside, the yen is inching higher and gold is closing in on its six-year peak.
Along with everything else that’s going wrong for world markets, we also now have the prospect of an Argentine debt default. The country’s treasury minister announced Buenos Aires will seek to "reprofile" some of its debt.
The bonds were already trading around 45 cents in the dollar, so that may not come as a huge shock, but a default is a default and its consequences are being felt. More on that further down.
The other piece of news is that Donald Trump's administration made official its extra 5% tariff on $300 billion in Chinese imports. That is bad news for shares in U.S. retailers.
A longer-term fear is that the levy, which will affect items such as smartwatches and bluetooth headphones — popular Christmas purchases — will threaten U.S. consumption, one of the few bright spots in the world economy. We could see an impact on share prices in Europe via Frankfurt-listed shares in companies like Walmart and Apple.
But the S&P 500 stands just 5% off July’s record highs. Possibly solace is being taken from the sight of central banks riding to the rescue.
The Federal Reserve and European Central Bank are expected to cut rates next month and the Bank of Japan might join them. Some countries are also mulling fiscal stimulus – South Korea being the latest to propose aggressive spending to counter the slowdown.
Then there’s Brexit. The pound is keeping its head above $1.2200 after slumping 0.61% the day before, when Prime Minister Boris Johnson decided to suspend Britain's parliament for more than a month before Brexit.
Investors are now waiting to see if the opposition can do anything when parliament re-opens, but the fact remains that no-deal Brexit became more probable yesterday. Deutsche Bank said it now sees a 50% chance of a no-deal Brexit. Shares in sectors such as housing and airlines and tourism are likely to stay under pressure.
Another session of losses seems to loom for Europe as investors remain cautious amid the growing no-deal Brexit worries and bond markets signalling recession. The UK's FTSE futures are sliding 0.4%, underperforming the rest of Europe. JPM analysts say the risks of a no-deal Brexit are "elevated" and that Johnson will use all the tools available to set himself up as a "deliverer of the will of the people".
In corporate news, we have some decent earnings updates from French companies. Bouygues is seen rising 2% reporting better-than-expected first-half core operating profit. Pernod Ricard could get a boost from launching a 1 billion-euro share buyback and raising its dividend by 32% after reporting strong profit growth for the 2018/19 financial year.
In the UK, Micro Focus shares are seen down 15% to 20% by one dealer after warning on profits because customers are not spending as much as expected. Swiss drugmaker Roche's shares are expected to rise as its immunotherapy Tecentriq gets European approval for tough-to-treat triple-negative breast cancer.
Banking software provider Temenos said it agreed to buy U.S.-based Kony for $559 million. Auto shares might have another bad day as UK car production fell for the 14th straight month.
Back to Argentina. Bonds are not yet trading, but further downside might be limited given where the debt was trading already. It is also likely that contagion into other emerging markets will be limited for now unless things get messy.
The peso is likely to take a further beating when trading begins later, forcing the central bank to dig further into its meagre reserves to save the currency.
We’ll get more clues on the state of world growth today - German unemployment numbers are likely to stay near historic lows, underscoring why the government remains reluctant to implement fiscal stimulus.
But preliminary figures may show headline inflation falling from 1.7% to 1.5%. That would only add to conviction that the ECB needs to act imaginatively. The United States will report the latest revisions to second-quarter GDP, possibly lowering it slightly.
Any good news out there? Italian 10-year yields are hovering around 1% after falling on Wednesday to record lows below that, on optimism that a new government comprising 5 Star and the Democratic Party would be formed.
Some reckon that a new government made up of vastly differing parties just puts off the crisis for a few months. But for now Italy is enjoying its moment in the sun.
— A look at the day ahead from Sujata Rao-Coverley, deputy EMEA markets editor. The views expressed are her own —