Global Recession Fears Triggered Another Risk-Off Shift In Markets


Commenting on today’s trading Gorilla Trades strategist Ken Berman said:

Risk-Off Shift
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The major indices all suffered a sizable hit today, erasing yesterday’s bounce, as fears of a global recession triggered another risk-off shift in financial markets. The Dow was down 800 or 3.1%, to 25,479, the Nasdaq lost 96, or 1.2%, to 7,774, while the S&P 500 shed 242, or 3.0%, to 2,841. Decliners outnumbered advancing issues by a more than 10-to-1 ratio on the NYSE, where volume was well above average.


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The wild moves in Treasuries and global government bonds were the cause behind today’s massive sell-off, as a lot of investors suddenly faced the very real danger of a severe global economic downturn. Today’s session will surely go down in history, since the 30-year yield hit its lowest level ever, while the inversion between the two-year and 10-year yield also added to the worries regarding the economy. While stocks are still holding up relatively well in comparison to Treasury yields, today’s dip could mean that the pullback will continue.

Stocks had their second-worst day of the year today, behind only last Monday’s rout. The fact that all of the key sectors, even the defensive ones finished deep in the red today describes the extent of the risk-off shift. As it was the case in recent weeks, the main-safe-haven assets performed very well, but long-dated Treasuries enjoyed the strongest inflows. Materials, industrials, and financials suffered the biggest hit, together with tech stocks and services, as yesterday’s trade-related optimism evaporated due to the weak economic numbers.

It’s hard to ignore the pronounced weakness in the Chinese economy, and although the official releases are usually ‘fine-tuned’ to avoid market disruptions, today’s numbers were nothing short of ugly. Industrial production growth hit its lowest level since the financial crisis, and retail sales also missed big time, erasing the rebound of the past couple of months. With several European countries also being on the brink of a recession, the threat of the new trade tariffs looks even more serious, since the global economy is likely even more fragile than analysts previously thought.

We will have the busiest day of the week tomorrow, with regards to economic releases, and volatility will likely remain elevated across asset classes. The retails sales report and the Philly Fed index could have the biggest impact on stocks, but industrial production, the Empire State Manufacturing Index, the NAHB Housing Market Index, and non-farm productivity will also be out. In light of today’s dismal Chinese and European indicators in mind, the global economy desperately needs U.S. growth to remain stable, with especially the consumer economy having the potential to support the expansion.

Tomorrow’s data dump will be especially important due to the increasing pressure on the Federal Reserve and Chairman Jerome Powell in particular. The plunging yields, the more and more extreme rate expectations, the deepening global slowdown, the escalating trade tensions, and of course, the President’s attacks are all weighing on Mr. Powell’s shoulders. Today, President Trump was quick to point at the Chairman in connection with the historic move in yields. Should tomorrow’s releases confirm the domestic slowdown, the Fed might have no other options than to ease aggressively to avoid an negative feedback cycle in financial markets. Stay tuned!

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