By Paul J. Davies and Caitlin Ostroff
-- S&P 500 futures drop 0.9%
-- German government bond yields hit a record low
-- U.S. 10-year Treasury yields fall below two-year yields
U.S. stock futures dropped and U.S. Treasury markets sent a new recession signal as 10-year yields fell below two-year yields for the first time since 2007.
U.S. 10-year yields on Wednesday fell to 1.614%, while the two-year was yielding 1.616%, a marginal inversion.
This kind of inversion between short and long-term yields is viewed by many as a strong signal that a recession is likely in the future. The Federal Reserve's preferred measure is the difference between 10-year and three-month yields, which have consistently shown this kind of recession risk signal since late May.
S&P 500 futures were down nearly 1%, reversing much of the 1.5% rise on Wall Street on Tuesday.
The moves came despite the White House abruptly changing its policy on Chinese tariffs on Tuesday, delaying a round of extra charges from September until December.
The delay helped put off concerns that the U.S.-China trade war would have knock-on effects for consumers and domestic demand, although they haven't gone away completely.
"The bar for an actual recession is very, very high [in the U.S.]," said Geoff Yu, head of U.K. investment office at UBS Wealth Management. "For asset allocators it's still a case of hope for the best but prepare for the worst."
Elsewhere European stocks fell after data showed the German economy shrank in the second quarter. The Stoxx Europe 600 was down 1.1%, while the German DAX dropped 1.6%.
Germany's economy contracted by 0.1% in the second quarter due to further declines in exports, and the latest data mean that average quarterly growth has been zero since the third quarter of 2018, according to ING.
The data put pressure on the German government to stimulate the economy through tax cuts or public spending.
"Right now the key question [for Germany] is just how much can the domestic demand offset international contraction," said Nadia Ghabari, an economist at Pictet Wealth Management.
The yield on the 10-year German bund touched a fresh record low of minus 0.645%, according to Tradeweb. Bond yields and prices move in opposite directions.
The debilitating effect of trade tensions also was visible in Chinese data, as value-added industrial production in the country grew 4.8% in July, significantly lower than the 6.3% increase in June and below expectations of 5.9% growth.
Still, Asian stocks rallied on the tariff delay, with shares in Shanghai up 0.4% and Japan's Nikkei up 1%. Hong Kong's Hang Seng was up nearly 0.1% as the city continued to struggle with protests and violence.
In commodities, gold prices edged up 0.5%, while Brent crude oil prices dropped 1.6% to $60.31 a barrel, pulling back from Tuesday's near 5% rally.
Write to Paul J. Davies at firstname.lastname@example.org