Mounting signs of a global economic slowdown hammered stocks and drove demand for sovereign bonds to such an extent that shorter-term yields rose above long rates in the U.S. for the first time since 2007.
The S&P 500 sank more than 2% and the Dow Jones Industrial Average plunged 600 points as the inverted gap in rates for two- and 10-year Treasuries flashed a warning that has normally preceded a recession. Financial s hares plunged 3% led by a 4% rout in Goldman Sachs. All but one of the 30 Dow components fell.
The S&P 500 has now lost 5.5% from its July record, though it remains above lows touched Aug. 5, and is higher by 13% in 2019. It's still more than 2% above its average price for the past 200 days, a closely watched technical level. Oil sank 5%, gold rallied and the dollar rose.
European shares lost more than 1.5% after Germany's economy contracted in the second quarter, adding to angst fueled by weak Chinese retail and industrial numbers. The British yield curve also inverted for the first time since the financial crisis and the pound edged higher after inflation unexpectedly rose. Government bonds rallied across Europe, with the yield on benchmark bunds sliding to another record.
The warning emanating from bond markets spooked investors already seeking shelter from the fraught geopolitical climate and the impact of the global trade war just a day after equities rallied on a tariff reprieve from President Donald Trump. While curve inversions normally precede economic downturns, they do not necessarily signal imminent doom.
"This is not a positive sign for the market," Jonathan Golub, chief U.S. equity strategist at Credit Suisse, said on Bloomberg TV. "The Fed is totally empowered to change this dynamic and the market is saying they have to."
Meanwhile, Hong Kong's airport resumed normal operations after a chaotic night of protest in which demonstrators beat and detained two suspected infiltrators and Trump warned of Chinese troops massing on the border.