Investors rushed into the safety of U.S. government bonds on Wednesday, muting a broad stocks rally as fears of a global recession grew.
Yields on the benchmark 10-year Treasury note fell to their lowest levels since October 2016, and gold soared to a six-year high, while riskier assets like stocks and oil dived.
On Wall Street, the Dow Jones Industrial Average opened more than 500 points lower, helping erase gains in European shares, before paring some losses.
MSCI’s gauge of stocks across the globe gained 0.09 per cent.
“Bonds are being bought in a panic mode,” said Andrew Brenner, managing director at National Alliance Capital Markets.
Based on the latest available data, the Dow Jones Industrial Average fell 22.45 points, or 0.09 per cent, to 26,007.07, the S&P 500 gained 2.25 points, or 0.08 per cent, to 2,884.02, and the Nasdaq Composite added 29.56 points, or 0.38 per cent, to 7,862.83.
Canada’s main stock index on Wednesday reversed early losses and jumped higher, despite crude prices slumping to their lowest in seven months.
The S&P/TSX composite index was unofficially up 115.73 points, or 0.72 per cent at 16,265.22.
The materials sector led gains, finishing 1.6 per cent, as gold’s role as a safe-haven asset propelled the metal to a six-year peak.
The energy sector dropped 0.5 per cent.
The Canadian dollar extended its losses, falling to a near seven-week low against its U.S. counterpart on Wednesday, as oil prices dropped and rising trade tensions worried investors.
The escalating U.S.-China trade war is adding to economic headwinds and hurting business sentiment.
The price of oil, one of Canada’s major exports, tumbled more than 4 per cent, extending recent heavy losses following a surprise build in U.S. crude stockpiles and fears that demand will shrink due to Washington’s trade war with Beijing.
“A perfect storm is definitely what we are seeing in the Canadian dollar right now where we are receiving shocks from falling oil prices, rising global trade tensions and financial turmoil, all at the same time.” said Karl Schamotta, director of global markets strategy at Cambridge Global Payments.
The Canadian dollar was trading 0.3 per cent lower at 1.3312 to the greenback, or 75.12 U.S. cents. The currency hit its lowest intraday level since June 19 at 1.3344.
The pan-European STOXX 600 index rose 0.24 per cent.
U.S. shares had gained overnight after President Donald Trump downplayed worries of a lengthy trade war and senior adviser Larry Kudlow said Trump’s administration was planning to host a Chinese delegation for talks in September. Wall Street futures gauges also rose.
The U.S. administration’s remarks marked a shift in tone from recent days, when Beijing warned that Washington’s labeling China as a currency manipulator would have severe consequences for the global financial order. The U.S. move rattled financial markets and dimmed hopes the trade war was ending.
Since then, China’s state banks have been active in the onshore yuan forwards market, tightening dollar supply and supporting the Chinese currency, sources told Reuters.
Despite that support, the yuan still dropped 0.2 per cent to 7.0708 in offshore markets, with currency markets still on edge after the People’s Bank of China (PBOC) set its official reference rate at an 11-year low..
“We had a little bit of recovery yesterday, but this morning we are seeing that stalling due to the PBOC fixing the dollar-yen higher again,” said Thu Lan Nguyen, FX strategist at Commerzbank.
The skittish mood was underlined by continuing demand for currencies and commodities considered safe havens.
Gold touched a six-year high of $1,489.76 per ounce. The Japanese yen rose 0.2 per cent to 106.26, although that was still some way from levels on Monday, when the trade war’s escalation panicked investors.
The rush to the yen was also fueled by a 2 per cent slump in the New Zealand dollar after its central bank made an aggressive interest rate cut and said negative rates were possible, promoting bets on further policy easing around the world.
Central banks, looking to rev up growth and fight low inflation rates, have turned increasingly dovish in recent months.
Benchmark 10-year notes last rose 14/32 in price to yield 1.692 per cent, from 1.739 per cent late on Tuesday, after touching earlier lows. Wednesday’s trough marked their lowest yield since 2016, as investors bet on another Federal Reserve rate cut in September.
Germany’s 10-year bond yield fell to record lows deep in negative territory as the bigger-than-expected Kiwi interest rate cut and weak German economic data fueled the rally in bond markets.
German industrial output fell more than expected in June, adding to signs that Europe’s biggest economy contracted in the second quarter as its exporters were caught up in trade disputes.
Oil prices tumbled more than 4.5 per cent on Wednesday to a seven-month low, extending recent heavy losses following a surprise build in U.S. crude stockpiles and fears that demand will shrink due to Washington’s escalating trade war with Beijing.
Brent crude futures settled down $2.71, or 4.6 per cent, at $56.23 a barrel, the lowest close since early January. Prices have lost 24.5 per cent since their 2019 peak in April.
U.S. West Texas Intermediate (WTI) crude futures finished $2.54, or 4.7 per cent, lower at $51.09.
Oil prices fell early in the session on worries about the trade war, then extended losses after government data showed a build of 2.4 million barrels in U.S. crude stockpiles last week, instead of the 2.8 million-barrel draw analysts had expected.
U.S. crude oil inventories had declined for seven consecutive weeks prior to last week’s build but were still about 2 per cent above the five-year average for this time of year, the U.S. Energy Information Administration (EIA) said.