Recession worries showing in the bond markets where the US and German gov’t bonds rallied
The constant fears of increasing interest rates and recession hit again on Wednesday, sending the world stock markets and oil prices into freefall. Meanwhile, the Japanese yen hit a new 24-year low versus the seemingly unstoppable U.S. dollar.
As Europe experienced a morning decline of 1.5 per cent and Brent crude prices fell by 4 per cent following what had also been a dismal Asian session, the enthusiasm that had given Wall Street its greatest day in a month on Tuesday was abruptly gone.
In the FX markets, fervent dollar bulls were also not holding back on their wagers that Federal Reserve Chairman Jay Powell will later emphasise to Washington the necessity of sharply raising U.S. interest rates.
“It is remarkable how quickly the market has turned again after that little squeeze up in sentiment yesterday,” said Saxo Bank FX strategist John Hardy.
“The commodity market seems to be calling a (global) recession,” he added. “And the dollar is pivoting to strength as a safe haven”.
Those recession worries were also showing in the bond markets where U.S. and German government bonds rallied as traders sought out traditional safe harbours.
The yield, which moves inverse to price, on benchmark U.S. 10-year Treasuries fell to 3.21% and Germany’s 10-year yield dropped 10 basis points (bps) to 1.65%, having hit its highest since January 2014 at 1.928% last week.
Nevertheless, the spreads between Germany and highly-indebted Italy widened again as Luigi Di Maio, Rome’s foreign minister in a complex coalition government, said he was leaving the 5-Star Movement to form a new parliamentary group, a move that threatens to bring fresh instability to Prime Minister Mario Draghi.Â read more
Wall Street futures were down well over 1% meaning the S&P 500 looked set to consolidate what could be its worst start to a year since 1932, although Deutsche Bank Jim Reid was trying to see the positive side.
“The 5 worst H1 performances for the S&P 500 before this year, all saw very good H2 performances,” he said, pointing out that on four of those five occasions, the U.S. index went on to gain at least 17%.
“In order of H1 declines, we saw 1) 1932: H1 -45%, H2 +56%, 2) 1962: H1 -22%, H2 +17%, 3) 1970: H1 -19%, H2 +29%, 4) 1940: H1 -17%, H2 +10%, 5) 1939: H1 -15%, H2 +18%,” Reid showed.
Overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) slumped 2.3% to close to a five-week low. Heavyweight Hong Kong-listed tech firms plunged over 4% (.HSTECH) although Tokyo’s Nikkei (.N225) managed to keep its losses to just 0.4%.
Investors are continuing to assess how worried they need to be about central banks potentially pushing the world economy into recession as they attempt to curb red hot inflation with interest rate increases.
The main U.S. share benchmarks rose 2% overnight on the possibility the economic outlook might not be as dire as thought during trade last week when MSCI’s main global stocks index (.MIWD00000PUS) logged its biggest weekly percentage decline since March 2020.
“I think that this recent post-holiday bear market rally is a reflection of the uncertainty that investors have regarding whether we have seen the peak of inflation and Fed hawkishness or not â I think we’re close,” said Invesco global market strategist for Asia Pacific David Chao.
U.S. Federal Reserve chair Jerome Powell is due to start his testimony to Congress on Wednesday with investors looking for further clues about whether another 75-basis-point rate hike is on the cards in July.
Economists polled by Reuters expect the Fed will deliver a 75-basis-point interest rate hike next month, followed by a half-percentage-point rise in September, and won’t scale back to quarter-percentage-point moves until November at the earliest.
Most other global central banks are in a similar situation, apart from the Bank of Japan, which last week pledged to maintain its policy of ultra-low interest rates. In contrast, the Czech central bank was expected to hike its rates by as much as 125 bps later, with inflation well into double figures.
That gap between low-interest rates in Japan and rising U.S. rates have weighed on the yen, which hit a new 24-year low of 136.71 per dollar in Asian trading, before drifting firmer to 136.20.
Minutes from the Bank of Japan’s April policy meeting released Wednesday showed the central bank’s concerns over the impact the plummeting currency could have on the country’s business environment.
The other big move was in commodity markets. The 4% slump in oil prices came amid all the recession angst and with U.S. President Joe Biden expected to call later for a temporary suspension of the 18.4-cents a gallon federal tax on gasoline, a source briefed on the plan told Reuters.
Brent dropped $5 to $109.79 a barrel, while U.S. crude fell 5.9% or $5.37 to $104.15. Metals buckled too with copper, nickel, aluminium and tin all down between 2.9% and 5.2%
“The latest in a long line of attempts to temper surging prices at the pumps is having the desired effect,” said PVM’s Stephen Brennock, talked about oil and pointing to an expected summer demand surge.
“Yet whether this knee-jerk reaction will stand the test of time is by no means guaranteed”. – Reuters