“Debt markets are flashing recession warning signs as sovereign bond yields slide at their fastest pace in years and the value of those in negative territory climbs to record highs.
“The benchmark US 10-year Treasury yield – the return on American government debt – is already on course for its biggest annual slide in eight years after last week’s surge in trade tensions between the US and China.
“The yields on UK gilts and German bunds are also dropping faster than at any time since 2014, dragged down by expectations of interest rate cuts by central banks to prop up growth and by investors seeking safety from market volatility.”
“Investors have flocked to fixed income mutual funds at the fastest rate since the financial crisis, piling in almost $500bn in the first half of 2019 during trade war tensions, recessionary fears and market volatility.”
“…the virtuous cycle of easy monetary policy and no inflation in the aftermath of the financial crisis has sucked money into bond funds at an incredible place. As trillions of dollars of cash have been created out of thin air by central banks, a large hoard of bond market holdings via low cost, passive indexed bond funds and ETFs has been the preferred way for both retail funds and many institutional investors to obtain exposure…
“The risk is that this virtuous cycle turns into a vicious cycle…”
“The economic outlook has deteriorated in all parts of the world over the summer due to an escalating trade dispute between the United States and China, a survey showed on Monday.”
“Germany, Europe’s industrial backbone, is stuttering. The unemployment rate has risen for the second time in three months. The UK economy contracted for the first time since 2012, as output fell 0.2% in April to June. Italy’s debt crisis is only being made worse by political uncertainty…
“What’s more, the European Central Bank looks like it’s out of bullets to fire the economy up.”
“…an ultra-nationalist right-wing government in Italy… might just make a push to abandon the euro zone.
“The fear has arisen after the country’s prime minister, anti-immigrant xenophobe Matteo Salvini (sometimes referred to as Italy’s own Trump) called for snap elections in the parliamentary democracy, as early as October.”
“The passing of President Beji Caid Essebsi leaves a huge political void in Tunisia’s fraught politics.
“His death comes not only against the backdrop of an escalating economic crisis but also in the wake of an intensifying political struggle at the very heart of Tunisia’s emerging democratic institutions…
“Tunisia’s conflicts could quickly seep into its two immediate neighbors. Islamic State-linked forces in Algeria, which in past years have struck across the frontier, might be emboldened to renew such attacks at the border or in Tunis itself.”
“A massive economic crisis is on its way [Turkey].
“Ankara has shown through a series of decisions, including the pruning of staff with international connections from the central bank and the change of administration in Turkey’s Financial Crimes Investigations Board, that it will face the coming whirlwind with a centralist and authoritarian mindset by employing nationalism and by withdrawing itself from the international community.”
“…the apparent tranquillity of this poor suburb of Zimbabwe’s capital hides a rude reality of misery and despair.
“The smoke rising into the evening sky is a clue. Power cuts now stretch from dawn to long after dusk. Gas is too expensive so families cook on firewood, gathering around braziers as the sun goes down and an almost total darkness comes.”
“Keep a close eye on more data on the health of the Chinese economy this week after deflation reappeared in the country’s huge industrial sector for the first time in three years…
“The re-appearance of deflation in China in July after being dormant since 2016 is a new worry.”
“The recent yuan softening and monetary policy easing by regional central banks are the latest moves stoking fears of an emerging currency war, with Thailand positioned in the middle of the crossfire.”
“Hong Kong businesses have been caught in a political crossfire as both protesters and government supporters take the fight to local companies that fail to see the current crisis the way they do.
“The trend of linking businesses to alleged political affiliations has escalated online.”
“…the lull that has gripped Singapore’s property market since its red-hot streak in the early 2010s could drag out further, buffeted by rising supply, a slow-moving rental market and a grim economic growth outlook.”
“Australia’s property downturn has been one of the steepest on record – and it is starting to have serious ripple effects across the entire economy.
“Despite stable price rises last month, property values across the country have plunged since their peak about two years ago.”
“A spiraling trade row between Japan and South Korea is being driven more by emotion than economic factors, analysts say, with leaders of the U.S. allies risking their security ties for domestic political considerations, to Washington’s consternation.
“Seoul and Tokyo — both of them democracies and market economies — this month removed each other from their lists of favored trading partners.”
“Global investment banks are shedding tens of thousands of jobs as falling interest rates, weak trading volumes and the march of automation create a brutal summer for the sector.”
“In its closely-watched monthly oil report, the IEA said there was “growing evidence of an economic slowdown” with many large economies reporting weak gross domestic product growth in the first half of the year. From January to May, oil demand rose by 520,000 bpd, marking the lowest rise in that period since the financial crisis in 2008.
““The situation is becoming even more uncertain,” the IEA said…”
“After a decade of extraordinary monetary policies, central banks had started a long, slow march back to normality. They hadn’t got very far before turning back again…
“Are we in for a nasty reckoning? Loose money is raising the risks. As well as encouraging spendthrift governments, businesses have also binged on debt…”
“Growing evidence of a severe global recession is sure to provoke more aggressive monetary policies from central banks. They had hoped to have the leeway to cut interest rates significantly after normalising them. That hasn’t happened.
“Consequently, as the recession intensifies, central banks will see no alternative to deeper negative nominal rates to keep their governments and banks afloat through a combination of eliminating borrowing costs and inflating bond prices.”
Central banks around the world are likely to loosen further, keeping sovereign yields very low. But we doubt that will bring about a clear economic improvement as quickly as investors hope. “
“With that in mind, we think that corporate earnings will fall well short of expectations later in 2019, hitting equities and corporate bonds.”