| A board above the trading floor of the New York Stock Exchange shows the Dow Jones Industrial Average closing number, Wednesday (local time). / AP-Yonhap |
Concerns growing over global economic recession
By Park Jae-hyuk
Fears of Korea falling victim to a global economic recession have been growing among investors here, following the unusual "yield-curve inversion" in the United States bond market Wednesday (local time).
Earlier that day, the yield on benchmark 10-year U.S. Treasury bonds fell below 1.6 percent, less than the return on two-year bonds for the first time since June 2007.
Yields on long-term bonds are usually higher than short-term rates, reflecting the risk of tying up investors' money for years or decades.
An inverted yield curve, which refers to a reversal where returns on short-term bonds are higher than long-term bonds, is, therefore, often regarded as a prelude to an economic recession, because it indicates investors are worried about tying their money up for a long time.
With fears of a recession, major Wall Street indices tumbled.
According to the New York Stock Exchange, the Dow Jones Industrial Average fell 3.05 percent, or 800.49 points, closing at 25,479.42. This was its biggest one-day fall this year.
The S&P 500 sank 2.93 percent, or 85.72 points, closing at 2,840.60. The Nasdaq Composite dropped 3.02 percent, or 242.42 points, to 7,773.94.
The U.S. yield-curve inversion also affected Asian financial markets Thursday.
Although Seoul could avoid the impact as its stock markets closed for the Liberation Day holiday, the Tokyo and Shanghai bourses were hit hard by recession warnings. As of Thursday afternoon, the Nikkei 225 showed a 1.56 percent drop, while the SSE Composite suffered a 0.62 percent decline.
Against this backdrop, analysts expressed concerns over the yield-curve inversion's impact on the Korean market.
"When yields of the 10-year and the three-month Treasury bonds were inverted in March, the global market could overcome the recession fear in a short period of time because the phenomenon was interpreted as a temporary distortion," Meritz Securities analyst Ha In-hwan said in a recent report.
"After the inversion of yields of 10-year and two-year treasury bonds, however, investors should seriously think about the recession fear."
Eugene Investment & Securities analyst Huh Jae-hwan said in a recent report that U.S. yield-curve inversions in the past caused a decrease or limited increase in Korean stock prices.
Global economic experts shared the view.
In a recent interview with The Korea Times, Antonio Fatas, an economics professor at INSEAD, said: "The biggest risk is the beginning of a global recession. If all this is not enough, the possibility of a no-deal Brexit on Oct. 31 and additional geopolitical risks, such as Iran, put the global economy on a very risky path. A recession can be avoided but it would require luck and the best possible economic policies. Both are unlikely."
Morgan Stanley said, "We would see the global economy entering a recession in three quarters," if the trade war between the U.S. and China escalates further.