European and US shares were thumped in overnight trading after the US bond curve signalled an imminent recession in the US. Bonds rallied everywhere. Oil and base metals tumbled and gold rose as investors fled growth exposures. Financials and energy stocks fell furthest as traders factored a weaker demand scenario and lower for longer interest rates. Currency markets remained relatively calm.

The flattening of the US government bond interest rate curve provided the trigger. Ten-year yields fell to 1.58% - the same level as two-year bonds. The potential for ten-year rates to invert below two-years provided the market trigger for a meltdown. While a yield curve inversion has preceded all six of the previous US recessions, not every inversion led to recession. However markets were in no mood for subtlety, and the damaging moves may provide their own rationale for more selling.

The sell-off comes despite a better than forecast US earnings season. More than 90% of SPX500 companies have reported. Aggregate earnings are up around 2%, beating forecasts of a negative quarter. However The Asia Pacific futures markets indicate opening losses around 2% for major markets.

Australian company results could add to market pressures. Telstra reported a 40% drop in profit, worse than forecast. Optimistic messages around the introduction of the 5G spectrum may not be enough to stem investor displeasure. Other misses include Blackmore’s, Cleanaway, Treasury Wine Estates and Super Retail. Both Sydney Airports and QBE Insurance delivered earnings above expectations, and funeral group Invocare surprised with a 7.5% lift.