Weakening global economic data and concern about the negative fallout from a trade war between the US and China continued driving another wave of risk-off sentiment across markets. German GDP slipped into negative territory in 2Q falling 0.1% QoQ raising the risk that the economy falls into recession (i.e. two consecutive quarters of falling growth). China’s weaker July data releases also added to concerns about the growth outlook: for example, fixed asset investment slowed to 5.7% yoy for the 7 months of the year and July industrial production growth slowed to 4.8% yoy from 6.3% yoy.
Equity markets sold-off with the Dow Jones falling over 800 points, its biggest decline since 2008, down 3.05% on the day and the S&P 500 fell 2.93%. The UST 2-10 year yield curve inverted during intraday trading, the first time since the GFC, and the US 30 year yield fell below 2% for the first time ever. Risk-off sentiment and concerns about weakening growth spread around the world with the UK Gilt 2-10 year curve inverting too.
The New York Fed’s index is showing the probability of US recession within the next year at close to 31.5% (using end of July data) and since the late 1960s when the index is above 30% a recession has ensued. That said, Janet Yellen cautioned overnight that the yield curves may not be as good a signal of recession as the past noting ‘The reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields.’ However, she then went on to warn that while she thinks the US economy could avoid a recession ‘the odds have clearly risen and they are higher than I’m frankly comfortable with’.
This uncertain backdrop and market volatility favours positioning in high quality credits offering a positive yields. Thus, despite the GCC bond markets having made strong gains YTD, helped by greater index inclusion and investor awareness, they continue to screen attractively among our universe.