Big blue chip stocks like BHP Billiton Ltd [ASX:BHP] and Australia and New Zealand Banking Group [ASX:ANZ] were hurt today as the ASX was down as much as 1.32%. This applies for both the ASX 200 and the All Ordinaries.
Here’s your quick guide to what happened.
Bond yield curve inverts, weak manufacturing and services data
While some outlets are leading with the headline that poor European PMI data drove the sell-off, I believe the bigger story behind the sell-off is the bond yield curve.
Basically, the yield curve on two prominent types of bonds has turned negative for the first time since 2007.
We all know what happened shortly after that happened — the GFC.
In fact, this economic bellwether has preceded all nine US recessions since 1955.
At its core, the yield curve inverts when long-term bond yields are lower than short-term bond yields, in this case, three-month and 10-year Treasury bonds.
It means the short-term outlook for the economy is negative.
This shouldn’t come as a surprise to investors, as you can see the spread has been pushing consistently lower since 2016 and has picked up pace recently.
And yet, it still sent ripples through the market.
What should I invest in if equity markets are facing difficulty?
People don’t stop buying groceries in a recession.
That being said, there is understandable excitement around gold and gold stocks. This last option, however, may need to be a short/mid-term play as gold stocks have also been hurt in the previous recession.
Last time, they spiked just before the recession as you can see in the GDX chart below (a gold miners ETF):
Something to consider.
For Money Morning