Recession concerns vie with inflation risk for investors in unpredictable market week ahead
It was aother week of declines for US markets on Friday, with the S&P500 closing lower for the seventh week in succession, making a fresh 18 month low, and briefly retracing 50 per cent of the move from its 2020 lows to its record highs late last year.
The Nasdaq 100 similarly pulled off new 18-month lows, with little sign that despite closing well off its intraday lows, that the downside pressure is set to diminish, as it posted its worst losing streak since 2001 when the dotcom bubble burst in 2001.
“One of the main characteristics of the recent weakness in US markets, has been concern over valuations given the length of time of this current rally,” Michael Hewson, chief market analyst at CMC Markets UK, said this morning.
“While the weakness in tech stocks has led to this current weakness there is increasing evidence that a combination of rising inflation, interest rates, and concerns over a weakening US economy could see a recession by year end.”
Consequently, the sell-off that started in tech is now starting to bleed into the wider market.Michael Hewson
Hewson pointed out that it is these concerns that appear to be driving US bond markets if last week’s price action is any guide.
For most of this year yields on US treasuries have risen at an accelerated rate, with the US 10-year yield rising from 1.51 per cent at the end of last year, to peak at the beginning of this month at 3.20 per cent.
“Since then, yields have lost momentum, and not because markets are dialling back their expectations for US rate rises, but because of rising concerns that we could be heading for a sharp slowdown in economic activity,” he added.
Hewson singled out the US dollar, saying it also appears to be showing early signs of failing momentum, posting its biggest weekly loss since early February, and first weekly loss since April, despite increasingly hawkish rhetoric from Federal Reserve officials.
“This more aggressive tone from the likes of Federal Reserve chairman Jay Powell, as well as other Fed officials, at a time when the likes of big US retailers Walmart and Target are issuing profit warnings, is prompting fears that the US central bank is willing to risk pushing the US economy into a recession in order to tame the inflation genie,” he explained.
“The calculation being made appears to be that with a buffer of an unemployment rate at multi year lows, and vacancy rates at record highs, they have enough wriggle room to absorb slightly higher levels of unemployment if it means getting prices under control.”
European markets also lost ground last week, however the losses were small in comparison, “even though concerns over a recession aren’t any less worrisome, given the higher levels of inflation being seen across Europe,” Hewson noted.
Last week the latest Germany PPI numbers for April saw yet another record high of 33.5 per cent, driven higher by surging energy prices.
“Yet we’re somehow expected to believe that headline CPI is at a mere 7.4 per cent on an annualized basis,” he continued.
“Economic optimism in Europe’s biggest economy has collapsed in recent months, as two of the country’s biggest export markets saw a collapse in economic activity.”Analyst Michael Hewson this a.m.
“The Chinese economy has ground to a halt in the last two months so much so that no cars were sold in Shanghai during the month of April, while Russia’s invasion of Ukraine has turned it into a global pariah,” Hewson stressed.
Looking at this week, Hewson said the main debate continues to be over whether we’ve seen peak inflation, and if so, how quickly can it fall back from current levels.
This week there will be a further insight into the US economy, with the latest US Q1 GDP numbers, as well as the latest Fed minutes, and US personal spending and income for April.
“Asia markets have got the new week off to a mixed start, with China markets under pressure again as cases of Covid in Beijing hit a new record, while the Nikkei has edged higher,” Hewson said.
“The positive start for the Nikkei looks set to bleed into a higher open for markets in Europe, with sentiment continuing to remain flaky at best,” he concluded.