* 10-year U.S. yields below two-year for first time in 12
years
* Markets fear inversion signals recession, hope for Fed
rescue
* Oil extends big overnight drop on demand, supply pressures
(Updates prices)
By Sujata Rao
LONDON, Aug 15 (Reuters) - China's threat to impose
counter-measures in retaliation for the latest U.S. tariffs
knocked stocks sprawling on Thursday, checking earlier attempt
to recover from a rout sparked by fears of a world recession.
Wall Street futures erased earlier losses and were trading
in positive territory, but the relentless drop in global bond
yields raised fears the world economy was hurtling towards
recession and weighed on global equities.
Expectations the U.S. Federal Reserve and other central
banks would respond robustly to the recession warning helped
world stocks to steady earlier. But that recovery was cut short
by the latest rhetoric from Beijing "The only game in town is the central banks, hence the bond
markets are rallying," said Peter Schaffrik, global macro
strategist at RBC Capital Markets.
"We have regional bonfires in Hong Kong, Argentina, Japan
against South Korea, and none of these are going away easily;
each and every one is not necessarily strong enough to cause
trouble."
Recession fears grew on Wednesday after yields on 10-year
Treasury bonds US10YT=RR dropped to less than two-year rates
for the first time in 12 years, when the same yield curve
inversion presaged the 2008 recession.
The curve has inverted before every recession in the past 50
years and sent a false signal just once US/ .
The latest inversion has since reversed, albeit marginally,
and yields on 30-year Treasuries US30YT=RR rose off the record
1.965% low reached in Asian trade. But they are still down 60
basis points in just 12 sessions.
Markets appear to be pinning their hopes, yet again, on
central banks, betting that scale of the scare would alarm
policymakers, especially at the Fed. Money markets price in a
growing chance the Fed will cut rates by half a point at its
September meeting. FEDWATCH
"We have seen stocks trading very poorly as a result of the
yield curve inversion, so that will be flashing some additional
warning lights for the Fed that they have to do more," said
Andrea Iannelli, investment director at Fidelity International.
"The only question is, can the Fed out-dove the market? At
the very least they will have to match market expectations in
the short term."
The Chinese comments sent a pan-European equity index down
more than half a percent .STOXX and markets in London and
Frankfurt lost over 1%. Earlier, Asian shares fell 0.5%.
Japan's Nikkei shed 1.2% as a yen surge hit the export-heavy
market .N225 .
German 30-year yields are below minus 0.2% DE30YT=RR for
the first time. Ten-year yields touched a record low of minus
0.67% DE10YT=RR .
The growth worries come amid economic stress in Argentina
and some other emerging markets, fears of Chinese military
intervention in Hong Kong and trade tensions that show no sign
of abating.
"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."
Not everyone buys the argument that recession is inevitable
-- 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 said.
He noted that since 1975, every curve inversion had been
followed by an S&P 500 rally that lasted almost two years and
delivered average gains around 40%.
SAFETY PLAYS
As the Sino-U.S. trade war escalates, long-dated bond yields
have fallen across the developed world, flattening yield curves
in what is considered a clear signal of a worsening growth
outlook.
What sent the U.S. curve over the brink into inversion was
German data on Wednesday that showed the economy had contracted
in the quarter to June. That came on the heels of dire Chinese
data for July. The British yield curve also inverted. The German curve is
at its flattest since 2008.
Oil prices plunged with Brent crude LCOc1 losing another
2% to $58.4 a barrel, after shedding 3% overnight.
Safe-haven gold was up 0.3% at $1,520 per ounce XAU= , just
off recent six-year highs.
The yen was flat at 105.8 to the dollar JPY= , having
earlier traded at 106.74. The currency has gained against the
dollar for eight of the past 10 sessions JPY=D3 . Excluding a
mini-crash episode in January, it recently hit 17-month highs
JPY=D3 .
The dollar index .DXY was down at 97.862, the euro up at
$1.1155 EUR= .
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U.S. yield curve inversion Aug. 14 2019 Image https://tmsnrt.rs/2YQ1VhR
Yield curves flattening https://tmsnrt.rs/2N3HiaY
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