The Dow Jones Industrial Average plunged over 600 points on Thursday with the benchmark 10-year Treasury note ticking lower to 2.876, confirming a risk-off sentiment has taken hold of the capital markets as fears of a global economic slowdown permeate investors’ psyche.
It’s welcome news for the bond markets as inflows of capital flood the fixed-income space, but to equities investors, it could be a sign of more pain to come.
“The tide is turning,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “The fact the 10-year yield is falling so sharply after the massive correction on Tuesday—we don’t even have a dead cat bounce—says there’s a lot more pain ahead for equities.”
On Monday, U.S. equities were boosted as U.S. President Donald Trump and Chinese president Xi Jinping agreed to cease fire on their tariff-for-tariff battle, giving the markets hope that a year-end rally could ensue. However, it proved to be an overreaction as volatility returned on Tuesday with the Dow shedding almost 800 points followed by Thursday’s decline.
The reality that a tangible and permanent trade deal is necessary for the markets to continue responding to the upside might be settling in and the probability of reaching an agreement didn’t improve after news broke that Meng Wanzhou, the CFO of Huawei, one of the world’s largest mobile phone makers, was arrested in Canada for sanction violations and faces extradition to the U.S. Investors reacted to Wanzhou’s arrest negatively as it could possibly squelch a permanent trade deal between the U.S. and China.
The truce reached at the G-20 Summit didn’t quell investor fears as markets fretted on the notion that a trade deal can only materialize after lengthy discussions between the two economic superpowers. Furthermore, contentious topics like forced technology transfer and intellectual property could derail negotiations.
Meanwhile, fears of an inverted yield curve also helped to rack U.S. equities as sell-offs in stocks were accompanied by an influx of capital into bonds. As equities investors seek asylum into safer-haven assets like debt, the shift is occurring across the spectrum whether it’s short or long-term durations.
Notably, inflows into short-term bonds are allowing for a steeping yield curve, which should ease some investor fears of the opposite–an inverted or flat yield curve, which could portend to a forthcoming economic slowdown.
“The expectations of further turmoil in equities and widening in credit is serving to support Treasuries,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc. “The main support for USTs being at the front end highlights that investors are comfortable in positioning contrary to what the Fed has been guiding the market to expect.”
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