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Markets have delivered an ominous sign that recession may be on the way while Germany’s economy shrank and Chinese industrial output slumped to a seventeen-year low amid deepening fears about the worldwide fallout from Donald Trump’s trade war.

Yield curves inverted on UK and US government debt on Wednesday, signalling deepening pessimism about both countries’ economic futures.

America has fallen into recession after the last seven times yield curves have inverted. An inversion means long-dated government debt is delivers a lower return than short-dated government debt.

Meanwhile, a poll this week found that the number of fund managers predicting the global economy could enter contraction in the next year jumped to its highest since 2011.

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Key Points

• Bond markets deliver ominous recession signal as yield curves invert in UK and US
• Poll finds fears of worldwide economic contraction hit eight-year high
• German economy shrinks in second quarter
• UK inflation jumps 2.1 per cent in shock rise

[14 August 2019 13:21 · ben.chapman]

Worth noting that while inverted yield curves have preceded a number of US recessions, the lag has been between 10 months and three years.

Many other factors could be in play during those time frames.

[14 August 2019 13:27 · ben.chapman]

Eyes will soon be on Wall Street where the Dow is expected to drop sharply after opening.

Futures on the closely watched US index indicate a drop of around 350 points immediately after the bell, CNBC reports.

This is closely linked to the movements in bond prices. Investors are pulling their money out of shares, fearing they may tank as a result of trade tensions and a global slowdown.

The money is flowing into the safety of government debt, driving the yields on that debt downwards.

[14 August 2019 13:50 · ben.chapman]

A handy visual representation of how the US yield curve has moved over the past year (up to the start of this month):

[14 August 2019 14:15 · ben.chapman]

US Commerce Secretary Wilbur Ross on the inverted yield curve:

"Formula's like that work when they work and they don't work when they don't work."

Well that clears that up then.

"...Eventually there will be a recession."

[14 August 2019 15:47 · ben.chapman]

"It’s easy to think of the trade tussle between the US and China as a pointless war thousands of miles away of no consequence to Britain," writes Olesya Dmitracova. 

"But the ripples from the clash have already reached this island and the effects will grow and multiply as the conflict drags on. 

"Perhaps the most direct and least obvious effect is the potential impact on the pound. 

How the US-China trade war is hurting Britain’s economy

[14 August 2019 15:55 · ben.chapman]

UK shares are down across the board today with the FTSE 100 losing 1.4 per cent, currently trading at 7,150.33.

Energy stocks led the falls, down 2.8 per cent so far.

Financial shares are also down 1.7 per cent and the tech sector is down 2 per cent.