Stock markets on both sides of the Atlantic saw hefty losses yesterday, gripped by fears for the global economy only a day after enthusiasm over possible detente in an ongoing US-China trade war had given them a dizzying lift.

A German GDP contraction in the second quarter, weak Chinese industrial output and an inversion of the US yield curve all seemed to cement fears of a global slowdown.

“The joyous reaction in the markets to the news that the US would delay increasing tariffs on some Chinese consumer products appears to have been short-lived,” said David Cheetham at XTB.

Eurozone indices were around two per cent down by the mid-afternoon, while on Wall Street the Dow Jones index lost nearly 400 points at the New York opening bell.

The yield on the 10-year US Treasury bond, meanwhile, briefly slid below the yield on two-year debt yesterday, a rare phenomenon that has often been a harbinger of recession.

Bond yields have gyrated in recent weeks, with analysts warning that sinking rates are a sign of a worsening medium-term and near-term economic outlook. XTB’s Cheetham noted, however, that stocks were not usually in immediate trouble from bond yield inversions.

Whenever yields inverted in the past 60 years, it took US stocks at least three months, and on sometimes even 22 months, before they peaked, he said.

European and US stocks had risen across the board on Tuesday on news that the United States had delayed tariffs on a swathe of Chinese goods easing tensions in their bitter trade war, an upward trend that was mirrored by Asian stocks yesterday.

Shanghai managed to end with a gain of 0.4 per cent despite data showing Chinese factory output expanded last month at its slowest pace in 17 years.

But in European trading, Frankfurt slumped after data showed Germany's economy contracted in the second quarter, highlighting its vulnerability to trade tensions and stoking debate on higher government spending.

Shrinkage of 0.1 per cent meant the eurozone’s largest economy lost significant momentum compared with the 0.4 per cent growth seen in January-March.

Germany actually lagged Italy’s standstill economy – and France which posted 0.2 per cent growth. 

Milan’s stocks index, meanwhile, tumbled by more than two percent, a reflection of Italy navigating a political crisis.

The dollar was down against main rivals, with sterling rising after official data showed UK an-nual inflation rose unexpectedly to 2.1 per cent in July from 2.0 per cent the previous month.

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