Market sentiment leans towards a global economic recession scenario

By: Miguel A. Rodriguez

11:50, 06 July 2022

The price of raw materials, including oil, dropped in the face of expectations of a slowdown in global demand

On the positive side, the collapse of commodities anticipates an improvement in the inflation figures, which will most likely be seen in the data published for June.

Should it continue, this movement will take pressure off the Federal Reserve to raise interest rates. Thus, the market anticipates deep falls in the yields of US treasury bonds, with the 10-year already below 2.80%, after reaching 3.50% recently. This is a huge move for the fixed income market driven by the purchase of bonds as safe-haven assets due to investors' fear of an economic crisis.

 

The Fed minutes published today may shed some light on the intentions of the Federal Reserve. But the data loses importance since it does not reflect the change in the scenario that has occurred in recent days, with a focus more on the slowdown economy than inflation.

Yesterday, however, the data on factory orders showed a considerable increase, indicating that the US economy is still far from the recession predicted by many economic analysts.

Therefore, uncertainty is still high. What seems to be more certain is that inflation has already reached its peak and that interest rates are not going to rise as much as anticipated a month ago - that should be good news for stock markets, at least partially.

 

It was demonstrated yesterday by the Nasdaq index that while the other two main Wall Street indices fell, the first managed to recover from the initial losses and remained positive. The better expectations about inflation and, above all, the lower market interest rates are beneficial for the technology companies that make up the index.

In Europe, however, the situation was different. The fear of a gas supply cut from Russia and the serious consequences that this could have on the German economy spread in the market and pushed the German DAX index 2.6% lower at the European close.

 

And this panic was reflected in the Euro price. It broke down the recent lows of 1.0360 and went to the 1.02 zone, approaching parity against the US Dollar. This movement will worry the European Central Bank given the inflationary consequences of a weak Euro.

 

The market will be very aware of the possible statements that the members of the ECB make these days in this regard. Most likely, the interest rate increases of 50 bps expected by the market will be carried out regardless of the bad data from the European economy, among other reasons, because they can serve to stop the fall of the Euro.

 

Sources: Bloomberg, Reuters

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