Benchmark 10-year U.S. Treasury yields fell to their lowest level since July 2016 on Tuesday, and all North American stock indexes were in the red amid heightened trade worries and a contraction in U.S. factory production.
European shares were also hurt by concerns over a global economic slowdown and uncertainty over Britain’s exit from the European Union.
As new tariffs on Chinese goods took effect over the U.S. holiday weekend, market participants appear to be losing faith that the world’s two largest economies will reach a near-term resolution to their long-running trade war, which has whipsawed markets for months and strained world economies.
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U.S. President Donald Trump said bilateral trade talks with China were going well, but warned he would be “tougher” if negotiations extend beyond the 2020 presidential election.
“This is a risk-off trade day,” said Robert Pavlik, chief investment strategist, senior portfolio manager at SlateStone Wealth LLC in New York. “It’s really just more concerns about the health of the economy complimented by trade and Brexit, manifesting itself in higher gold prices, a higher dollar and lower Treasury yields.”
U.S. manufacturing output shrank in August for the first time in 3-1/2 years, according to the Institute for Supply Management’s Purchasing Managers Index (PMI), stoking fears that the global economic slowdown has reached American shores.
“(The ISM data) was confirmation that manufacturing has been in a decline since reaching a peak a year ago,” Pavlik added. “It’s not a great sign, not the kind of sign you want to see in a slowing economy.”
The Dow Jones Industrial Average fell 285.26 points, or 1.08 per cent, to 26,118.02, the S&P 500 lost 20.2 points, or 0.69 per cent, to 2,906.26 and the Nasdaq Composite dropped 88.72 points, or 1.11 per cent, to 7,874.16.
Canada’s main stock index fell on Tuesday as domestic manufacturing activity slowed in August amid global trade worries, while a sharp slide in oil prices weighed on energy shares.
The Toronto Stock Exchange’s S&P/TSX composite index was unofficially down 42.84 points, or 0.26 per cent, at 16,399.23.
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IHS Markit data showed, a measure of new orders fell to the lowest since December 2015, while the output index was in contraction for the fifth straight month and a measure of business optimism dropped to a three-and-a-half year low.
Six of the index’s 11 major sectors were lower.
The energy sector dropped 0.9 per cent, as oil prices, one of Canada’s major exports, dropped on rising OPEC and Russian oil output.
The financials sector slipped 0.5 per cent, while the industrials sector fell 1.4 per cent.
The materials sector, which includes precious and base metals miners and fertilizer companies, added 0.5 per cent as gold futures rose.
The Canadian dollar was little changed against the greenback on Tuesday, with the currency recovering from a two-month low hit earlier in the day on global economic worries as the focus shifted to this week’s Bank of Canada interest rate decision.
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The Canadian dollar was trading nearly unchanged at 1.3325 to the greenback, or 75.05 U.S. cents. The currency, which fell last week for the seventh straight week, touched its weakest intraday level since June 19 at 1.3382.
“It is now in a nice holding pattern, waiting for the Bank of Canada tomorrow,” said Amo Sahota, director at Klarity FX in San Francisco. “We think the Bank of Canada is going to signal that they may join the chorus of other central banks looking at lowering their interest rates.”
European stocks pulled back from a 1-month high after the disappointing U.S. PMI data compounded worries of a global economic sluggishness, while uncertainty over Britain’s hard exit from the European Union put an end to the FTSE 100’s four-day winning streak.
The pan-European STOXX 600 index lost 0.23 per cent and MSCI’s gauge of stocks across the globe shed 0.67 per cent.
U.S. Treasury yields fell, with the benchmark 10-year yield at its lowest since July 2016 after the downbeat ISM report exacerbated worries about a weakening global economy in the shadow of the U.S.-China trade war.
The 10-year yield fell as low as 1.4290 per cent and was last down 3.2 basis points to 1.4741 per cent. The two-year yield was 4 basis points lower to 1.4660 per cent. The fall was greater in shorter-dated maturities, enough to steepen the yield curve out of inversion. The spread between two- and 10-year yields was last at 0.50 basis points.
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The ISM report was “yet another piece of data showing a weaker manufacturing sector. That’s the story. To the extent that manufacturing remains weak, that increases the potential chance for a recession down the road. That means lower yields and lower inflation expectations,” said Michael Pond, head of global inflation-linked research at Barclays
Trade and Brexit concerns drove the dollar against a basket of major world currencies to its highest level since mid-May 2017, but the greenback paired its gains following the release of the ISM factory data.
The dollar index rose 0.03 per cent, with the euro up 0.05 per cent to $1.0972.
The Japanese yen strengthened 0.28 per cent versus the greenback at 105.93 per dollar, while Sterling was last trading at $1.2098, up 0.27 per cent on the day.
Oil prices fell on Tuesday, with U.S. crude futures down 2 per cent after manufacturing data raised concerns about a weakening global economy, while the U.S.-China trade dispute continued to drag on investor sentiment.
U.S. West Texas Intermediate (WTI) crude futures fell $1.16, or 2.1 per cent, to settle at $53.94 a barrel. The session low was $52.84 a barrel, the lowest since Aug. 9.
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Brent crude futures lost 40 cents, or 0.7 per cent, to settle at $58.26 a barrel. It sank as low as $57.23 a barrel, also the weakest since Aug. 9.
Prices extended losses following data that showed U.S. manufacturing activity in August contracted for the first time in three years. Earlier, separate data showed euro zone manufacturing activity contracted for a seventh month in August.
“That deterioration is continuing to undermine the demand growth outlook for oil,” said John Kilduff, a partner at Again Capital in New York.
Gold prices rose more than 1 per cent, with the safe-haven precious metal hovering just below its more than six-year high of $1,554.56.
Spot gold added 1.0 per cent to $1,546.21 an ounce.
Copper lost 0.16 per cent to $5,611.00 a tonne.
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Three-month aluminum on the London Metal Exchange rose 0.31 per cent to $1,754.50 a tonne.
Reuters
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