TOKYO (BLOOMBERG, REUTERS) – Asian shares tumbled on Monday (March 25) as risk assets fell out of favour on growing worries about an impending US recession, sending global bond yields plunging.
The risk-off tone that built on Friday extended into Asia early Monday, as indexes of shares in South Korea, Japan and Australian fell more than 1 per cent.
Japan’s Topix index declined 2.3 per cent as of 9.11am in Tokyo. South Korea’s Kospi index dropped 1.4 per cent while Australia’s S&P/ASX 200 Index fell 1.1 per cent.
US stock futures were marginally higher during early Asian hours. On Friday, all three major US stock indexes registered their biggest one-day percentage losses since Jan 3 with the Dow sliding 1.8 per cent, the S&P 500 off 1.9 per cent and the Nasdaq dropping 2.5 per cent.
Australia’s 10-year bond yield hit an all-time low after the yield on Germany’s 10-year bonds tumbled below zero and a closely watched gauge of Treasuries inverted for the first time since 2007, underscoring the return to globally low long-term rates. The US dollar edged higher.
Global equities are showing signs of cracking, after rising to a five-month high, amid a slew of weakening economic data and commentary on the slowing world expansion from the Federal Reserve and others that’s helped embolden a rally in sovereign bonds. Gains in stocks left the S&P 500 Index and MSCI World Index trading near the levels they were at during the height of last year’s market rally.
“I’m starting to worry that the US could be facing a more severe downturn next year,” said Erik Nielsen, chief economist at UniCredit Bank AG in London. “Markets will be volatile most of this year, along a risk-off path. I’ll sell on strengths, and I don’t buy much on weakness.”
Investors also digested news that Special Counsel Robert Mueller found no evidence anyone close to President Donald Trump colluded with Russia in the 2016 presidential campaign. While Mueller failed to exonerate Trump on obstruction of justice, Attorney General William Barr said he did not find enough evidence to pursue that charge.
Concerns about the health of the world economy heightened last week after cautious remarks by the US Federal Reserve sent 10-year treasury yields to the lowest since early 2018. Adding to the fears of a more widespread global downturn, manufacturing output data from Germany showed a contraction for the third straight month.
In response, 10-year treasury yields slipped below the three-month rate for the first time since 2007. Historically, an inverted yield curve – where long-term rates fall below short-term – has signalled an upcoming recession.
“We have re-run our preferred yield curve recession models, which now suggest a 30-35 per cent chance of a US recession occurring over the next 10-18 months,” said Tapas Strickland, markets strategist at National Australia Bank.
Typically a 40-60 per cent probability sees a recession within the next 10-18 months, Strickland added, basing the analysis on previous recessions.
“The risk of a US recession has risen and is flashing amber and this will keep markets pricing a high chance of the Fed cutting rates.”
Much of the concerns around global growth is stemming from Europe and China which are battling separate tariff wars with the United States. Political turmoil in Britain over the country’s exit from the European Union is also a major overhang for risk assets.
On Sunday, Rupert Murdoch’s Sun newspaper said in a front page editorial British Prime Minister Theresa May must announce on Monday she will stand down as soon as her Brexit deal is approved.
The British pound was last flat at $1.3209 after three straight days of wild gyrations. The currency slipped 0.7 per cent last week.
In currency markets, the Japanese yen – a perceived safe haven – held near its highest since Feb 11. It was last off 0.1 per cent at 110.04 per dollar.
The Australian dollar, a liquid proxy for risk play, was down for its third straight session of losses at US$0.7072.