(Bloomberg) — As stocks stumbled in recent weeks, a cohort of Wall Street pros took solace as credit markets held firm and economic data proved benign.
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On Thursday, neither offered much relief.
After President Donald Trump escalated his trade war across the Atlantic, corporate bond investors – historically dubbed the smart money for presaging economic shifts – took cover. The cost to protect high-grade debt against default hit the highest intraday level since the wrenching, if short-lived, selloff in August last year. Hedging across popular high-yield ETFs jumped, while at least six companies opted to postpone bond sales.
On the economic front, a seemingly mild inflation report failed, again, to calm market jitters, with at least one measure of price changes for goods showing a sharp jump.
As evidence builds that the intensifying trade spat is threatening America’s investment and consumption cycle, dip-buying in equities evaporated, while Adobe Inc. and American Eagle Outfitters Inc. were the latest to offer a bleak signal on consumer demand.
All that was enough to send the S&P 500 down another 1.4% Thursday, tumbling into its first 10% correction in almost two years. The tech-heavy Nasdaq 100 — already in a correction — slid 1.9%.
Still, if there’s any enduring takeaway from the latest market action this week, it’s this: Credit markets are now beginning to confirm the growth angst that’s fueled a more than $5 trillion equity wipeout since late February.
“If credit spreads continue to widen much more from here, I think it tells you that the market is starting to price in a high chance of a recession,” said Priya Misra, portfolio manager at JP Morgan Asset Management ,who has decrease credit risk exposure recently. “I think that credit will not be able to shrug off any weakness in economic data.”
The immediate cause for the latest plunge in risky assets was straightforward: Trump’s threat to impose a 200% tariff on wine, champagne and other alcoholic beverages from the European Union. The president followed up with a vow that he wouldn’t repeal tariffs on steel and aluminum that took effect this week, spurring fresh pangs of cross-asset volatility.
High-flying tech stocks bore the brunt of the selling pressure. The VIX, Wall Street’s so-called fear gauge, this week hovered near the highest levels since the Aug. 5 meltdown. Once again, Bitcoin failed to make good on its diversification promise, as touted by digital-asset diehards, dropping once again and is now about 25% off its January peak. The good news is that bonds are providing a hedge against equity losses of late, with an ETF tracking long-duration bonds scoring nearly a 1% gain on Thursday. Ten-year Treasury yields have tumbled more than 50 basis points since their January peak.