Wednesday 19.00 GMT

What you need to know

  • German Xetra Dax falls 1.2%; FTSE 100 sheds 1.4%
  • US markets shut to mark the death of former president George HW Bush
  • Uncertainty over US-China trade war truce persists
  • Markets remain unsettled by Treasury yield curve inversion
  • Canadian dollar falls after BoC turns more dovish

Overview

Global stocks came under renewed pressure following Wall Street’s steep sell-off on Tuesday, with the mood unsettled by lingering concerns about the US-China trade dispute and the recent flattening of the Treasury yield curve.

China made its first comments on the trade ceasefire agreed by the two countries at last weekend’s G20 meeting, expressing confidence it could reach a deal with the US within 90 days.

But the remarks — attributed to an unnamed commerce ministry spokesperson — did little to improve sentiment in Europe, where stocks fell pretty much across the board. US markets were closed to mark the funeral of former President George HW Bush.

Meanwhile, the Treasury yield curve remained a big focus for participants after the inversion of the two-year/five-year segment, and a sharp drop in the gap between two-year and 10-year yields, fuelled concerns about the US economy.

“An inverted yield curve, where short-term rates are higher than long-term rates, has historically been a precursor to a recession,” said Ryan Detrick, senior market strategist at LPL Financial.

Mr Detrick acknowledged the sharp drop in the two-year/10-year spread to its lowest since July 2007 but emphasised that this segment of the curve was not yet inverted.

“We’ve seen periods with a relatively flat yield curve that have lasted for years before a recession — the mid-to-late 1990s, for instance.

“Contrary to what many people think, inverted yield curves don’t always sound the alarm to sell [equities]. In fact, looking at the past five recessions, the S&P 500 didn’t peak for more than 19 months, on average, after the yield curve inverted.”

Meanwhile, analysts also cited persistent uncertainty about the UK’s exit from the EU as a factor behind the recent deterioration in the market mood.

However, analysts at JPMorgan said the opinion of the European Court of Justice advocate general that the UK could unilaterally revoke its Article 50 notification meant a no-deal Brexit was significantly less likely, and the no-Brexit probability had increased.

“Markets have not yet adequately reacted to our view that ‘no-deal’ risks have fallen,” JPMorgan said.

There was positive news from Italy, where the prime minister signalled a willingness to modify his government’s budget plan in response to criticism from Brussels — with some caveats.

Italy’s stock market outperformed its European peers, while the country’s 10-year government bond yield fell to its lowest since September.

“This has reduced the probability that an escalation of hostility might sharply increase the government’s funding costs,” said Loredana Maria Federico, chief Italian economist at UniCredit.

Meanwhile, the Canadian dollar was one of the day’s big FX casualties as it fell to an 18-month low against its US namesake.

The Bank of Canada, as expected, left interest rates unchanged but delivered a more downbeat assessment of the economy than six weeks ago — which analysts said was hardly surprising given oil’s recent slide.

Crude prices continued to recover yesterday — with Brent rising as high as $63.29 a barrel, up 10 per cent from last week’s 13-month low — ahead of a meeting of Opec and other big suppliers.

Equities

The FTSE All-World equity index was down 0.5 per cent at a one-week low.

The pan-European Stoxx 600 index ended 1.2 per cent lower, with Frankfurt’s Xetra Dax falling by the same margin and the FTSE 100 in London ending 1.4 per cent lower.

Asian stock markets were broadly lower, with the CSI 300 in China shedding 0.5 per cent, the Hang Seng in Hong Kong falling 1.5 per cent and the Topix in Tokyo ending 0.5 per cent lower.

In New York on Tuesday, the S&P 500 fell 3.2 per cent, one of only eight declines of more than 3 per cent in the past five years. The Nasdaq Composite dropped 3.8 per cent.

Forex

China’s onshore renminbi weakened against the dollar after reaching its strongest level in more than two months on Tuesday. The offshore rate was 0.3 per cent weaker at Rmb6.8692.

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The dollar index was flat, with the euro little changed at $1.1347 and the greenback up 0.3 per cent versus the yen at ¥113.12.

Sterling was up 0.3 per cent against the dollar at $1.2753, while the euro was down 0.2 per cent at £0.8896.

The Canadian dollar was 0.8 per cent weaker at C$1.3369 per US dollar after earlier touching C$1.3399, its weakest point since June 2018.

Italy’s 10-year government bond yield fell 8 basis points to 3.07 per cent.

Commodities

Oil prices rose as participants awaited any announcements on output cuts from the meeting of Opec and its partners. Brent, the international crude benchmark, was up 0.5 per cent at $62.41, with US West Texas Intermediate 0.6 per cent higher at $53.59.

Gold was little changed at $1,238 an ounce.

Additional reporting by Edward White in Taipei and Michael Hunter in London

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