Global markets were on edge yesterday as dire U.S. economic data slammed Wall Street and pushed investors to bet the Federal Reserve could reverse its policy tightening before the end of this year. Fears the Sino-U.S. trade battle would drag down world growth roiled risk-sensitive assets in 2018, driving a surge in volatility and sending major stock markets deep into the red. Those worries found some basis this week as Apple Inc cut its revenue forecast for the first time in nearly 12 years, blaming weaker iPhone sales in China. Its shares crashed nearly 10 percent overnight. That followed Thursday's disappointing survey data from the Institute for Supply Management (ISM), which showed U.S. factory activity slowed more than expected in December. The dismal report drove investors to the safety of bonds. Yields on the two-year Treasuries sank below 2.4 percent to reach parity with the federal funds effective rate for the first time since 2008. Three- and five-year yields were even lower, an inversion that has sometimes heralded recessions in the past. Yields on 10-year benchmark paper dropped to 2.55 percent, a staggering turnaround from the highs of 3.25 percent seen as recently as November. The falls kept the dollar on the defensive. The greenback plumbed a more than nine-month low of 105.25 against the safe-haven yen on Thursday, driven by technical factors amid thin holiday trade. It has fallen more than 2 percent so far this week, the biggest weekly loss since last The Fed had raised rates a total six times through 2017 and 2018 to 2.00-2.25 percent as the U.S. economy galloped ahead, the jobless rate dived and inflation showed signs of picking up. Investors had initially expected the policy tightening to continue through this year but the ongoing trade war and recent disappointing corporate earnings have put those expectations to rest. The interest rates futures market also reacted sharply on Thursday with the December Fed funds contract surging 18 ticks to 97.77, implying a cash rate of just 2.23 percent. A couple of months ago, it was pricing in a rate of 3 percent. Investors now see rates at 2.00 percent by the middle of next year. Concerns about a U.S. recession whacked Wall Street overnight, with the Dow skidding 2.8 percent, the S&P 500 down 2.5 percent and Nasdaq losing more than 3 percent. MSCI's gauge of stocks across the globe shed 1.4 percent on Thursday. Keeping with the risk-off theme, gold prices hit a 6-1/2-month peak of $1.294.88 an ounce.
