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Asia stocks mostly sell off as bond markets signal recession warning

Lisa Micheal 5 Aug 14

Shares in Asia mostly dropped Thursday morning as the main yield curve in U.S. Treasurys inverted, triggering fears over the state of the U.S. economy.

In mainland China, the Shanghai composite shed more than 0.6%, while the Shenzhen component declined 0.72% and Shenzhen composite fell 0.747%. Hong Kong's Hang Seng index, on the other hand, recovered from its earlier slip to rise 0.26%.

In Japan, the Nikkei 225 fell 1.21%, while the Topix index dropped 1.18%. Australia's S&P/ASX 200 also tumbled 2.23%, as an earlier data release showed the jobless rate unchanged despite employment numbers in the country soaring past expectations in July.

The MSCI Asia ex-Japan index shed 0.55% overall.

Markets in South Korea and India are closed on Thursday for holidays.

Investors will be watching the bond market today, after the yield on the benchmark 10-year Treasury note briefly broke below the 2-year rate overnight, an odd bond market phenomenon that has historically been a reliable indicator of economic recessions. The yield on the 30-year Treasury bond was also sent to a new record low on Wednesday.

The yield inversion between the 10 and 2 year Treasury note happened again in the morning of Asian trading hours, with the yield on the 10-year Treasury note last at 1.5573%, as compared to the 2-year rate at 1.5629%. The 30 year Treasury bond also touched fresh historic lows on Thursday.

"We shouldn't ignore that this historically reliable indicator of the economy is telling us a recession may be looming. But markets have changed significantly in the last decade and yield curve inversion is not the harbinger it once was," Kerry Craig, global market strategist at J.P. Morgan Asset Management, wrote in a note.

"Yield curve inversion is flashing a warning sign – investors should check their portfolios are resilient. But it's not a reason to panic or to lean into the sell-off," Crais said. "The market corrections can also offer fresh opportunities to pick up equities at more reasonable valuations."

The People's Bank of China set its official midpoint reference for the yuan at 7.0268 per dollar on Thursday, weaker than analysts' expectations.

It was the sixth consecutive session where the People's Bank of China (PBOC) fixed the midpoint at a level weaker than the psychologically important 7-yuan-per-dollar mark.

The onshore Chinese yuan last traded at 7.0318 against the greenback, while its offshore counterpart changed hands at 7.0462 per dollar.

The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 97.954 after surging from levels below 97.8 yesterday.

The Japanese yen, widely viewed as a safe-haven currency, traded at 105.89 against the dollar after strengthening sharply from levels above 106.5 in the previous session. The Australian dollar changed hands at $0.6781 after touching an earlier low of $0.6743.

Oil prices slipped in the morning of Asian trading hours after seeing sharp losses on Wednesday. International benchmark Brent crude futures declined 0.71% to $59.06 per barrel, while U.S. crude futures shed 0.53% to $54.94 per barrel.

Here's a look at some of the data due today:

  • Hong Kong earnings: Ping An Group, Vanke

— CNBC's Yun Li contributed to this report.