USA stocks veer lower in latest bout of market volatility

USA stocks veer lower in latest bout of market volatility

USA stocks suffered the worst day of the year Wednesday as bond market flashed a warning sign of recession.

What does that mean? .

Analysts view both bonds as a key indicator in USA economic health, and some expressed concern Wednesday the losses might indicate a coming recession.

The rug was pulled out from under USA stocks on Thursday, with the Dow dropping sharply to breach key technical levels as worries over a global recession were stoked by a worrying signal in bond markets. The yield curve shows how much it costs to borrow over the short term compared to the long term. "Going forward, we have an inverted yield curve because everyone else has negative rates".

The most watched elements of the yield curve are the yields on two-year and 10-year bonds.

Such an inversion, considered a classic recession signal, occurred last in June 2007 when the USA sub-prime mortgage crisis was gathering pace US2YT=RR US10YT=RR. Drops like this are typical for stocks, and they're the price investors have had to pay for better long-term returns than bonds historically.

When yields on some shorter-term bonds rise above those on longer bonds - as is now the case - it has historically signaled a pending recession.

"The bond market is saying central banks are behind the curve", Marc Ostwald, global strategist at ADM Investor Services in London, said in remarks cited by Bloomberg. It was the first time the 10-year yield was below the 2-year yield since 2007 - just before the Great Recession.

The Hang Seng Index in Hong Kong and China's Shanghai Composite Index also dropped at market open.

Former Federal Reserve Chairwoman Janet Yellen has sought to assure the public that the indicator doesn't necessarily mean a recession. The government's choices about which bonds to sell could cause an over-supply or under-supply in some parts of the yield curve, which in turn could invert the curve.

China called on the United States to meet it halfway on a potential trade deal as U.S. President Donald Trump said any pact would have to be on America's terms.

"It could be different this time", Carlson said.

Graf said the backdrop now was not a "perfect apples to apples comparison" to the last curve inversion episode, which happened just over a year before the collapse of Lehman Brothers sent the world economy into a tailspin.

Fed officials cut the benchmark interest rate by 0.25 percentage points last month, the first rate cut since December 2008. Major U.S. stock indexes were down about 2%. It marked the first time since 2007 that 10-year bond yields fell below 2-year yields.

A bond is a promise to make certain payments in the future, usually a large one when the bond "matures" and smaller ones in the interim, typically every six months. The spread is widely used as a gauge to study the yield curve.

"The yield curves are all crying timber that a recession is nearly a reality and investors are tripping over themselves to get out of the way as economic recession hurts corporate earnings and stocks can drop as much as 20 per cent", said Chris Rupkey, chief financial economist at MUFG Union Bank.

"The reality is that central banks around the world are responding to a diminished outlook, looking to cut rates and ease financial conditions, so basically it means the Fed's not cutting rates in a vacuum", said Jon Hill, an interest rate strategist at BMO Capital Markets in NY. No recession occurred in 1966, even though there had been an inversion.

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