Investors seek safety in bonds, alarming US markets that recession may coming

U.S. markets extended their monthlong retreat Wednesday as investors accelerated their flight from equities for the relative safety of bonds, reflecting concerns that a U.S.-China trade scuffle has settled into trench warfare.

The Dow Jones industrial average, which hit a three-month low after the opening bell, is headed for its sixth-consecutive week of losses. It fell 400 points, or 1.5%, Wednesday, dragged down by Johnson & Johnson, Nike, Boeing and Chevron. Three of the 30 blue chips were positive: Dow Chemical, Intel and Procter & Gamble.

The Standard & Poor's 500 index dropped 30 points, or 1%, All 11 sectors fell into the red.

Both the Dow and the S&P 500 are down about 5.5% for May.

The technology-laden Nasdaq composite fell 85 points, about 1.1%.

Asian markets closed mostly down, with the tech-heavy Shanghai Composite up 0.16%. Japan's Nikkei slid 1.2% and the Hong Kong Hang Seng tumbled 0.57%. Europe is more vulnerable than the U.S. to global economic pressures and it showed, with all red arrows. France's CAC 40 led the slide at a 1.83% drop.

Recent market angst is centering on the yield on the closely watched U.S. 10-year Treasury, which hit a 20-month low Wednesday and fell below the yield on the three-month Treasury bill. The 10-year hit its lowest level since September 2017. The reversal, known as the inverted yield curve, is a fairly consistent - but not absolute - warning of a recession. The 10-year Treasury yield ripples across the economy, affecting everything from mortgage rates to credit card debt.

"The bond market is frightening the stock market with the death spiral in yields setting off alarm bells for investors as an inverted yield curve says a recession is near," according to a note published Wednesday by Chris Rupkey, chief financial economist at MUFG.

The storm is occurring even as the U.S. economy roars ahead with record unemployment, low interest rates, wage growth and above average economic growth. Economists and Wall Street wags point to the U.S.-China trade war as the one variable that could stifle growth.

But the back-and-forth of economic threats between China and the United States has increased in the past several weeks, erasing stock market gains and creating uncertainty among companies and consumers who fret about prices, supplies and exports.

U.S. stocks had been on a roll coming into May because of the strong U.S. economy. But external forces detoured the markets in recent weeks as anticipation of a U.S.-China trade deal evaporated. The Federal Reserve also signaled that it probably will not raise interest rates this year, feeding more disappointment.

The United States is confrontational on several economic fronts. Companies began complying last week with a White House order to curb sales to Chinese telecom giant Huawei, sending U.S. technology stocks sharply lower and signaling what is likely to be widespread fallout that will hurt not only one of China's most important companies but suppliers in the United States and consumers around the globe.

With $105 billion in global sales last year, Huawei has customers and suppliers on nearly every continent.

The United States finds itself in a dangerous war of wills with the Iranian government over U.S. sanctions against that country over its nuclear program and the U.S. belief that Iran is a supporter of terrorism. The Trump administration dispatched an aircraft carrier, bombers and other military equipment to the Persian Gulf region this month as threats between the two countries escalated.

China upped the stakes in the trade war recently when its flagship Communist Party newspaper hinted that Beijing may cut rare-earth exports that are essential components to a host of U.S. technology tools, including smartphones and electric vehicles.

Bloomberg recently reported that a trade war could erase $600 billion from the global economy in 2021.

"The U.S. 10-year bond yield has been going down since Nov. 8," said Ed Yardeni, president of Yardeni Research. "Even back then, there was concern about the U.S.-China trade war. But there was also concern over what the Fed would do. The market is now increasingly saying that the Fed is going to lower interest rates, particularly if the trade war between the U.S. and China escalates."

Yardeni added that even with U.S. bond rates lower, they are still attractive around the globe as Europe and Japan go to zero or even negative interest rates.

"The U.S. bond market has stood out as being the one with the highest yields," Yardeni said. "Here we are at 2.22%, and the yield is still more attractive than the near-zero bonds in Europe and Japan."

The potential slowdown in the world economy unnerved commodities. The price of copper, viewed as an indicator of global economic health, was down more than 1% on worries of a slowdown.

Oil prices were down as well. Benchmark West Texas Intermediate was down $1.81 to $57.34 per barrel, a 3% decline. Brent crude was down more than 2% at $67.17 per barrel, about $1.48.

"Once again, it's the escalating trade war that is spooking the market in general and is particularly bad for commodities and crude oil in particular," said John Kilduff of Again Capital.