The Wall Street comeback

Thursday was a turning point on Wall Street. The Dow Jones Industrial Average tumbled as much as 785 point, before sharply paring those losses in the final hour of the session. Major indexes opened modestly lower and continued falling as the arrest of a top Chinese technology executive, a decline in oil prices exacerbated recent concerns about global economy and interest rates kept markets on edge.

But once news of Federal Reserve officials considering whether to signal a new wait-and-see mentality at their meeting in December that could slow down the pace of rate increases next year were reported, stocks staged a stunning reversal.

But Wall Street’s afternoon comeback came too late to salvage what was a grim day for other major markets. The European Stoxx 600 index ended Thursday down 3.1% — its worst one-day performance since the UK voted to leave the EU in 2016 — at its lowest level in over two years. The UK’s FTSE 100 index slumped 3.2%, its worst decline since the Brexit vote.

“The stock market is signalling a recession is on the horizon, a recession that is man-made, with two back-to-back trading days of heavy losses that has sent investors running for the exits,” said Chris Rupkey, an analyst at MUFG.

However, a more optimistic tone could be heard from Mark Esposito, founder and chief executive of Esposito Securities: “Today has been one of the craziest trading days of the year […] If the Fed eases off raising rates, then the concern about a recession falters and goes away.”

The FTSE All-World index, which measures $54 Trillion worth of global stocks, was down 1% by the end of trading on Thursday, extending its loss this year to nearly 7%.

Declines across European markets had accelerated earlier after Saudi Arabia’s energy minister Khalid al-Falih indicated that Opec producers meeting in Vienna were working towards a deal to cut output that could fall short of traders’ expectations.

Even if Federal Reserve officials still think that the broad direction of short-term interest rates will be higher in 2019, it is fair to note that, as they push up their benchmark, they are becoming less sure of how quickly they will need to act or how far they will need to go.

On the global stage, plenty of reasons to be worried remain. For instance: skepticism about prospects for a 90-day truce between the US and China, as Trump administration aides played down the chances of striking a broad deal and President Trump threatened further tariffs on imports from China.

“This is going to continue to be a headwind at a time when people are worried about global growth,” said Dan Clifton, a head of policy research with the analysis firm Strategas.

For most of the year, the United States — less reliant on trade than most wealthy nations — had been a global standout, thanks to a burst of fiscal stimulus from the Trump tax cuts, while the trade war caused trouble in the rest of the world’s financial markets.

Export-based economies closely tied to China — like Japan and Germany — have started to struggle too. Growth in emerging markets, which often supply the commodities that have fueled the Chinese boom in recent decades, has also been hurt.

In China, the situation isn’t rosy at all. Chinese equities dropped sharply, with the benchmark CSI closing down 2.2% following the arrest in Vancouver of Meng Wanzhou, Huawei’s chief financial officer and the daughter of its founder, after an extradition request from the US.

That high-profile detention comes as doubts were already growing over whether the ceasefire in tariffs that Donald Trump and Xi Jinping agreed at the G20 summit in Argentina will lead to a deal that repairs relations between the world’s two largest economies.

“While China may stomach fines, investigations and market restrictions against its national champion, we do not believe it will tolerate the arrest of a CFO,” said Laban Yu, equities strategist at investment bank Jefferies. If the US do not change course, “trade negotiations are in serious jeopardy”.

Western governments have stepped up pressure on Huawei, whose founder and chief executive, Ren Zhengfei, is a former People’s Liberation Army officer. In recent years, this chinese tech company has been the focus of concern over corporate espionage and cyber security, but has repeatedly denied having connections to China’s security services or the military.

Investors will next turn their attention to Friday’s highly anticipated employment report. Economists expect 198,000 jobs added during November and unemployment held at 3.7%.

According to Michael Arone, chief investment strategist for State Street Global Advisors, who shook off recession fears in an interview with the Wall Street Journal, “the U.S. has never had a recession when U.S. corporate profits have been growing,[…] so although the backdrop is shifting somewhat from a higher growth regime to a lower growth regime, it’s too early to call the end of the bull market.”

With Jessica Menton, Robin WigglesworthAdam Samson, Hudson Lockett, Alexandra Stevenson and Matt Phillips

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