Shares in Asia Pacific have slumped after a key market indicator flashed an “amber warning” that the United States could be heading for a recession.
Bond yields also continued to fall across the world with Australian 10-year treasury yields falling to a record low on Monday of 1.756% in what analysts see as a strong indicator of a downturn hitting the resource-rich country.
Stocks were also under pressure in Sydney with the ASX200 benchmark index closing down 1% to a four-week low.
Equities were sold off across Asia Pacific. In Japan the Nikkei closed down 3%, bond yields slipped to their lowest point since 2016 and the yen – seen as a safe haven investment – was at its highest in more than a month. The Kospi index in Seoul dropped 1.8%, the Hang Seng was down 1.82% and Shanghai retreated 1.3%.
In commodities, Brent crude oil futures eased 47c to $66.56 in a sign of falling confidence in the world economy.
The FTSE100 was expected to dip 0.4% when trading begins on Monday morning.
The market action on Monday was a response to the biggest losses in US shares since the beginning of January on Friday when the Dow Jones sank 1.8%, the S&P 500 was off 1.9 percent and the Nasdaq dropped 2.5%.
Concerns about the health of the world economy heightened last week after remarks by the US Federal Reserve indicated that it would not raise interest rates this year. The comments confirmed to analysts that the Fed has backflipped on its hawkish policy of the past year when it hiked rates four times and is now more pessimistic about the outlook for the US economy.
Adding to the fears of a more widespread global downturn, manufacturing output data from Germany on Friday showed a contraction for the third straight month.
In response, US 10-year treasury yields slipped below the three-month rate for the first time since 2007 as nervous investors ploughed their money into the safe haven of bonds rather than riskier assets such as shares.
This so-called inversion of the of the bond yield curve – where long-term rates fall below short-term – has predicted every recession for the past 60 years. It is a function of bond markets that the return, or yield, falls when the price of the bond rises.
“We have re-run our preferred yield curve recession models, which now suggest a 30-35% chance of a US recession occurring over the next 10-18 months,” Tapas Strickland, markets strategist at National Australia Bank told Reuters.
Typically a 40-60% 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.”
In Australia, falling bond yields are seen as a sign that the Reserve Bank of Australia will have to cut rates at least twice this year. Borrowing costs are already at a record low of 1.5% and the bank’s governor, Phillip Lowe, had suggested until recently that the next move in rates could be up.
But a deteriorating housing market, weak wages growth and uncertainty about the outcome of a federal election set for May have combined to convince investors that the bank will reduce the cash rate.
“If the Reserve Bank of Australia is slow to cut or respond to global headwinds, then we can see Australia’s yield curve flattening dramatically,” said Tano Pelosi, portfolio manager at Antares Capital in Sydney. “It will suggest the RBA is behind the curve.”
The Australian dollar, which is seen by investors as a proxy for global risk appetite, was down for its third straight session of losses at US70.73c.