Shares slump as bond markets flash warning signals not seen since financial crisis

14 August 2019, 14:04 | Updated: 14 August 2019, 22:03

Shares have plunged after bond markets flashed recession warning signals not seen since the global financial crisis - following a slew of gloomy economic data.

In New York the Dow Jones slumped by 800 points, or just over 3% - its biggest one-day drop so far this year. Earlier, London's FTSE 100 Index closed more than 100 points, or 1.4%, lower.

It came after returns yielded by 10-year US bonds - parcels of government debt repaid after a set period of time - fell below two-year bond yields for the first time since the crisis more than a decade ago.

The phenomenon, known as "yield curve inversion", was also seen in UK bond markets - the first time it had happened since 2008.

It means bond investors are demanding bigger returns for the risk of investing in the short-term than they are for the long-term - seen as a significant indicator that they have lost faith in the economy.

Normally, investors would be expected to demand greater yields for putting their money away in bonds for a longer period.

In the US, such inversions have preceded the last nine recessions dating back to 1955.

The latest turmoil on markets came after official figures showed German growth went backwards in the second quarter while there were more signs of the damage wrought on the Chinese economy by its trade war with America.

Share falls were seen in London and New York as well as across Europe while oil prices - which tend to reflect the strength or weakness of global demand - also took a hit.

Brent crude slipped by 4% to less than $60 a barrel.

Markets have seen volatile trading over the last few weeks, focused on the escalation of the trade war between Beijing and Washington.

Investors fear the spat between the world's two largest economies will further drag on already-weakening global growth.

This week, crises in Hong Kong and Argentina, coupled with the worries over US-China relations, saw US stocks tumble on Monday.

But they made a sharp recovery a day later when the Trump administration said it was delaying the imposition of 10% tariffs on some of the $300bn worth of Chinese imports which had been due to come into force next month.

Wednesday's turmoil came after figures showed Germany shrank by 0.1% in the second quarter of the year.

Europe's biggest economy is an export powerhouse particularly exposed to the fall-out from the US-China trade war.

Meanwhile, data from China showed the slowest growth for industrial output in 17 years.