Share market tumbles as recession fears grow

US stocks fell about 3% and major indices in Europe were down 2%. Photo: Getty Images
US stocks fell about 3% and major indices in Europe were down 2%. Photo: Getty Images
New Zealand's share market has opened sharply lower, falling 1% after Wall Street closed down 3% on recession fears.

Share markets also fell in Europe after a closely watched bond indicator pointed to the growing risk of a US recession that was heightened by data showing Germany's economy in contraction and China's worsening.

Yields on two-year US Treasury notes rose above the 10-year yield for the first time since 2007, known as an inverted yield curve, which is widely seen as a classic recession signal.

US stocks fell about 3% and major indices in Europe were down 2%, while crude prices slumped almost 4%.

The tone for markets was set by data showing Germany's economy contracted marginally in the three months to June, with Chinese industrial production rising at its weakest pace since 2002 adding to investor fears of a global economic slowdown.

"The combination of those three things (yield inversion, Germany's GDP and Chinese industrial production) has refreshed fears of a global slowdown," Michael Arone, chief investment strategist at State Street Global Advisors said.

"We're seeing that flow through to stock prices falling and yields across the globe plummeting as well."

Negative interest rates from the European Central Bank and Bank of Japan are creating an adverse effect on yields everywhere, including the United States, Mr Arone said.

"How much more can US interest rates rise in the face of all those low interest rates? In a lot of ways it's almost like the medicine continues to make the patient more sick."

The slide in stock prices continued the volatile trend this week when key indices have been on a roler coaster ride of surging gains one day following precipitous falls.

Part of the volatility is explained by automated, programme trading triggered by the yield inversion.

"This level of sell-off is primarily driven by institutional program trades," Randy Frederick, vice president of trading and derivatives for Charles Schwab, said.

"Moves of this magnitude are mostly driven by programs that are tied to the inverted yield curve".

The volatility was just as evident in commodity markets where Brent crude oil futures dropped 3.8 pct to $US58.94 a barrel, while gold, often bought as a safe asset, rose 1 pct to $1516 an ounce.

"There is plenty of doom and gloom to spread across the globe," John Doyle, vice president for dealing and trading at investment firm Tempus Inc, said.

There is also a growing consensus that parts of Europe Germany, Italy and the United Kingdom are headed for a recession.

- RNZ and Reuters 

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