North American markets plummeted Tuesday as a bond market move signalled a potential recession ahead, prompting declines in the key industrials, energy and financial sectors.
The yield on two- and three-year Treasury notes surpassed five-year notes in a partial yield curve inversion that often portends a recession in the years to come, says Craig Jerusalim, portfolio manager at CIBC Asset Management.
“The market associates that with higher risk of recession and as a result risk assets are being sold across the board,” he said.
In addition, the two- and 10-year Treasury note shrank to their narrowest range since 2007.
Historically, an inversion of those notes typically occurs six to 12 months ahead of a recession.
“So this partial inversion doesn’t necessarily mean that the clock has begun ticking as of yet,” he said in an interview. “It’s a potential signal for what could come.”
In addition, markets fell on a dampening of enthusiasm on a China-U.S. trade deal following comments from both sides and ongoing noise about Brexit, Jerusalim added.
The S&P/TSX composite index suffered the largest daily loss in six weeks as it closed down 211.39 points to 15,063.59.
All sectors but telecommunications and utilities fell, led by a 4.6% drop by health care, followed by industrials, energy, technology, consumer discretionary and financials.
Health care dropped as Aphria Inc. shares fell by another 21% in the wake of a short-sellers’ report that targeted its recent Latin American acquisitions and raised questions about its operations in the region.
Despite strong quarterly results, Bank of Montreal shares dropped when the bank didn’t achieve its operating level targets.
Meanwhile, Teck Resources Ltd. gained 2.1% after selling a stake in its Chilean copper mine project that will allow the Vancouver company to remain cash flow positive.
Also partially offsetting the declines on the TSX were higher prices for oil and gold.
The January crude contract was up US30¢ at US$53.25 per barrel and the January natural gas contract was up US 11.8¢ at US$4.46 per mmBTU.
The February gold contract was up US$7.00 at US$1,246.60 an ounce and the March copper contract was down US5.05¢ at US$2.76 a pound.
The Canadian dollar traded at an average of US75.65¢ compared with an average of US75.81¢ on Monday.
In New York, the Dow Jones industrial average fell 3.1% by losing 799.36 points at 25,027.07. The S&P 500 index was down 90.31 points at 2,700.06, while the Nasdaq composite lost 3.8% or 283.09 points to 7,158.43.
Potential negative catalysts to come are another U.S. Federal Reserve rate hike and a jobs report on Friday. U.S. markets are closed Wednesday for a national day of mourning for former President George H.W. Bush.
“Investors have been jittery this entire earnings season,” Jerusalim noted.
“Any company that has shown any signs of disappointment has been overly punished and I think this is just one more indication that the market doesn’t have high confidence and valuations have therefore already contracted and are likely to contract further.”