MacroscopeEasy money is losing its magic as global recession fears spread

The Fed’s abrupt reversal of a rate hike cycle has succeeded in ramping up anxiety about a global slowdown. In the current climate of fear, bad news for the economy might no longer be good news for markets

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Trader Thomas McArdle works on the floor of the New York Stock Exchange on Wednesday. The Dow Jones Industrial Average sank 800 points after the bond market flashed a warning sign about a possible recession for the first time since 2007. Photo: AP

Published: 1:00am, 16 Aug 2019Updated: 4:55am, 16 Aug 2019

The “bad news is good news” mantra has pervaded financial markets ever since the world’s leading central banks embarked on quantitative easing to help shore up recession-ravaged economies during the global financial crisis.

It is a testament to the potency of ultra-loose monetary policy that mere hints of additional stimulus have been enough to spark some of the fiercest rallies in markets over the past several years. As recently as the start of last January, signals from the Federal Reserve that it would be patient in deciding whether to raise interest rates again were enough to send stocks soaring.

However, as I have argued previously, the Fed’s decision to reverse course in such an abrupt manner – the US central bank went from raising rates for the fourth time in 2018 to opening the door to a rate cut within the space of just six weeks – was bound to exacerbate fears about the slowdown in the global economy, especially since the Fed’s dovish pivot was prompted by the weakening growth outlook abroad, rather than in the US itself.

One of the counterweights to mounting concerns about growth this year has been the collapse in bond yields, which provides support to equity valuations and encourages investors to allocate money to risk assets to generate higher returns.

The global stock of negative-yielding government and corporate debt stands at an all-time high of US$16 trillion, according to data from Bloomberg. Yet, rather than viewing the dramatic decline in yields as a fillip to asset valuations, investors are instead focusing on the bleak message fixed-income markets are sending: the global downturn is rapidly gaining momentum, and is likely to result in a recession.

Since hitting a record high on July 26, the benchmark S&P 500 equity index has plunged 6.1 per cent despite a decline in the 10-year Treasury yield to 1.68 per cent, below its level before the election of Donald Trump as US president in November 2016.