Overnight the Dow Jones Industrial Average fell 800 points, recording its biggest one-day fall this year. It was a reaction to data which showed the world economy slowing further, driven in part from President Trump’s trade protectionism.

When economies slow, or risk recession, it usually drives a movement in investments from shares to bonds, as investors seek certainty and preserving their capital over pursuing growth. The chart below shows the interest rates of the comparable 10 year bonds. Swiss & German government bonds are in negative territory, and this in itself reflects a number of issues including a recessionary economy, the ECB’s quantitative easing, and broader risk aversion.

Data overnight showed a forward looking indicator in the world’s second largest economy- slowing. Chinese industrial production slowed to 4.8% year-over-year, its lowest level since 2002.

The double-whammy in data released was confirmation that Germany is in trouble. The German economy shrank by 0.1% in the second quarter of 2019, the first time since 3Q of 2018. Weakness in the global manufacturing sector (where Germany is a powerhouse), and uncertainty over Britain’s planned exit from the European Union, proved reason for the slowdown in Europe’s largest economy.

In response to the data, 10 year yields sank, as investors piled money into safe haven assets. The chart above plots the interest rate on US, Australian, and German government bonds over the last year. While the red line has been sub-zero (blue dotted) since March, the green & blue lines are being drawn lower too.

Where it costs an investor to park their money in German government bonds, they actually earn a return if they invest in the Australian or US government (similar assets, but a higher return = carry trade). This ‘carry trade’ is helping push our government bond rates lower, and in turn the interbank rates where banks/companies can borrow.

Meanwhile, this is great for borrowers, but not so good for our aging population relying on deposits for income.