World shares fall as investors hope central banks will respond to recession fears

Economic stress in Argentina, fears of Chinese military intervention in Hong Kong and trade tensions worldwide are all pressuring the economic outlook, analysts note.

“You have a lot of forces that weigh on the global economy, which doesn’t really mean it needs to be a recession. The only policy response is from central banks, hence the market is rallying,” Schaffrik added.

Money markets price a growing chance the Fed will cut rates by half a point at its September meeting.

“Hoping for the best on the policy front but positioning for the worst on the economic backdrop seems to be the flavour of the day,” said Stephen Innes, a managing partner at Valour Markets. “The Fed, now out of necessity alone, will need to adjust policy much more profoundly than they expected.”

Moreover, not everyone buys the argument that recession is inevitable, given that bond markets have been distorted by a decade of multi-trillion-dollar central bank stimulus.

Mark Haefele, chief investment officer at UBS Global Wealth Management said how long the curve remained inverted, and to what extent, was crucial. “If Fed rate cuts successfully steepen the curve comfortably into positive territory, this brief curve inversion may be a premature recession signal. Neither does a yield-curve inversion indicate it is time to sell equities.” 

Haefele noted that since 1975, every curve inversion had been followed by an S&P 500 rally that lasted almost two years and delivered gains of around 40% on average.

Safety plays

Global growth concerns have mounted as the China-US trade war escalated, and what sent the curve over the brink was German data on Wednesday showing the economy had contracted in the quarter to June. That came on the heels of dire Chinese data for July.

These concerns have sent oil prices plunging with Brent crude losing another 0.5% to $59.16 a barrel, after shedding 3% overnight.

Gold has surged to six-year highs, benefiting, like bonds, from investors’ need for safe-haven assets. It dipped on Wednesday by 0.2% to $1,512 an ounce but stayed near its recent $1,534 high.

The yen, too, pulled back 0.3%, having firmed for eight of the past 10 sessions against the dollar. Excluding a mini-crash episode in January, it recently hit 17-month highs.

The dollar index was a shade easier at 97.925, with the under-pressure euro at $1.1149 following Wednesday’s soft German data.

Mizuho senior economist Colin Asher forecast more yen strength. “Regardless of the type of slowdown in the US, it will be bad news for the Japanese economy as one of its major trading partners heads for slower growth. This is likely to be negative for asset markets and boost demand for the yen.”

Reuters