US stocks have registered their biggest one-day drop of the year and bond yields plunged after China allowed its currency to fall through a key threshold, escalating the trade war between Washington and Beijing and raising concerns about the outlook for global growth.
In a broad-based sell-off that saw all sectors on Wall Street close lower, the benchmark S&P 500 sank to a two-month low, leaving it down 6 per cent from its record high in July.
Demand for US government bonds, to which investors typically flock during times of trouble, pushed the yield on the 10-Treasury note sharply lower, and a bond market indicator of recessions flashed its most bearish signal since 2007.
“If the trade war escalates we may end up talking ourselves into a recession — that is the concern we’re seeing in the markets today,” said Anik Sen, global head of equities for PineBridge Investments. “There is very little visibility in any of this and that is the frustration because it keeps changing from day to day.”
A global sell-off began on Monday after China allowed its currency to weaken below Rmb7 to the dollar, resulting in hefty falls for Asian and European stocks and prompting US President Donald Trump to accuse Beijing of currency manipulation.
Declines for US stocks accelerated around midday in New York after it was reported Chinese companies had suspended purchases of agricultural products and that Beijing had not ruled out the possibility of imposing tariffs on US agricultural products purchased after August 3.
Zippy Duvall, president of the American Farm Bureau Federation, said China’s announcement represented “a body blow to thousands of farmers and ranchers who are already struggling to get by”.
Further souring the mood, Mr Trump said in a series of tweets on Monday that China had “used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers’ wages and harm our farmers’ prices. Not anymore!”
His remarks come at a time of strained trade relations between Washington and Beijing. Both sides again arrived at an impasse during negotiations last week and last Thursday’s announcement that new tariffs would be placed on $300bn of Chinese goods next month.
The S&P 500 closed 3 per cent lower, its biggest one-day drop since December 4 and sixth consecutive session of declines — marking its longest losing streak in 10 months.
The Dow Jones Industrial Average shed 2.9 per cent, and the Nasdaq Composite dropped 3.5 per cent, their biggest respective falls since December. The Russell 2000, which tracks small-cap stocks that are more exposed to the domestic economy, dropped 3.2 per cent on Monday, leaving it down about 15 per cent from its peak last August and in correction territory.
The Cboe’s Vix, a measure of volatility nicknamed Wall Street’s “fear gauge”, jumped above 23 points for the first time since mid-May.
Government bonds extended a recent rally that has taken place against a backdrop of confusion about the Federal Reserve’s outlook for interest rates and the Trump administration’s tariffs announcement last week.
US government debt climbed sharply in price, leaving the 10-year Treasury yield down 12 basis points at 1.735 per cent on Monday. Last week saw the biggest weekly decline for 10-year yields since 2012.
The 10-year yield has fallen about 80bp since the start of May as concerns over trade and signs of a slowdown in the global economy have built.
The moves in the bond market, with longer-term borrowing costs dropping even further below short-term ones, resulted in the difference between the yields on 3-month and 10-year Treasuries falling to its most negative since April 2007. The inversion of this yield curve has preceded every US recession of the past 50 years.
“There is a risk that there is a bit of codependency with Trump’s rhetoric surrounding trade,” said Mark Cabana, rates strategist at Bank of America Merrill Lynch. “The more the Fed eases, the less economic impact will be felt and the more emboldened Trump feels to ratchet up trade tensions. It puts the Fed in a bind, and they will continue to be pushed around by trade uncertainty.”
The drop for US stocks, which took their cue from European and Asian bourses, came after last week’s 3.2 per cent fall in the MSCI All-World stock index — the heaviest retreat since the market ructions of late 2018.
The UK’s FTSE 100 was down 2.5 per cent, France’s CAC 40 shed 2.2 per cent and Germany’s Dax declined 1.8 per cent. MSCI’s broad index of Asian stocks outside Japan fell 2.9 per cent, with Japan’s Topix sliding 1.8 per cent.
Traders priced in further stimulus measures from the US Fed, with futures trade suggesting the central bank’s main rate will be 1.03 per cent at the end of 2020, 19bp lower than expected on Friday. That means market participants are now forecasting 100bp of rate cuts by December next year, after the Fed last week cut rates by 25bp in the first such reduction since the financial crisis.
Across the Atlantic, the yield on the UK’s benchmark 10-year government bond struck a historic low, breaching a trough it hit in the wake of the 2016 referendum on the UK leaving the EU. It fell as much as 5.9bp to 0.49 per cent. In Germany, the 10-year Bund yield struck a record low, falling as much as 4.7bp to minus 0.53 per cent.
The drop in China’s renminbi to under 7 per US dollar also cascaded into other major emerging market currencies. South Korea’s won was among the worst hit, sliding 1.4 per cent against the dollar, while other actively traded currencies like South Africa’s rand were also under pressure.
Robert Carnell, head of Asia-Pacific research at ING, said China allowing its currency to fall below Rmb7 was probably a “deliberate decision, and part of what we imagine will be a concerted series of steps aimed at pushing back at the latest US tariffs”.
Japan’s yen, which tends to rise during times of strife as domestic investors pull money back from global markets, strengthened 0.5 per cent against the dollar to ¥106.08.
In commodities, gold rose 1.5 per cent to $1,461.60 an ounce as traders sought havens while global oil marker Brent crude was down 3.4 per cent at $59.84 a barrel.
Additional reporting by Leo Lewis in Tokyo, Edward White in Seoul and Richard Henderson in New York