Global stocks continued to slide and investors sought the safety of government bonds, the yen, the Swiss franc and gold on the first trading day of June as rising trade tensions sparked fears of an upcoming recession (which according to Morgan Stanley will hit in 3 quarters or less, while JPMorgan said the probability of a U.S. recession in the second half of 2019 had risen to 40% from 25% a month ago) denting stocks again...
With no improvement in tone or sentiment between the US and China, and in fact with China striking a combative tone on Sunday, blaming the U.S. for the collapse in trade talks and saying it won’t be pressured into concessions after the White House rattled markets Friday by announcing tariffs on Mexican goods, the worsening trade and broader economic backdrop made for a jarring start to June after a torrid May that wiped $3 trillion off global equities.
Also over the weekend, China’s Defence Minister Wei Fenghe warned the United States not to meddle in security disputes over Taiwan and the South China Sea, after acting U.S. Defence Secretary Patrick Shanahan said Washington would no longer “tiptoe” around Chinese behaviour in Asia.
“We’re in a phase of brinkmanship -- it’ll be a difficult month,” Rob Mumford, an emerging market portfolio manager at GAM Investments, said at a roundtable in Hong Kong. “We’re at the maximum pressure.”
US equity index futures all pointed to a drop at the open, though losses were pared modestly from earlier in the session. In Europe, the Stoxx 600 Index also came off its lows, with gains in food and healthcare shares offsetting declines in banks. European shares fell further and the Swiss franc jumped to a two-year high as Beijing sent another shot across Washington’s bows on trade and then euro zone data came in weak though the main groundswell was in bonds.
“No one now thinks a deal would be possible at the G20. It is going to be a prolonged battle. Investors are rushing to the safe assets,” Mitsubishi’s Fujito said.
German government bond yields dropped to a new record all-time lows of -0.219%, while those on two-year U.S. Treasuries were seeing their biggest two-day fall since early October 2008, when the global financial crisis was kicking off.
There was not flight to safety for Deutsche Bank, whose stock dropped to a new all time low, sliding below €6.00 for the first time ever after JPMorgan said DB's issue is not about capital or liquidity but about poor operating profitability and it needs to stop "tinkering with its restructuring efforts." The German bank "needs to make objective decisions about what business and/or asset can be closed or reduced", JPM's Kian Abouhossein and Amit Ranjan wrote, adding that CEO Sewing is “up to the challenge” to take action against status quo as he is over-delivering on cost targets. One look at the chart below suggests the market disagrees.
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