Recession fears driving risk assets lower

Stocks slipped in early trading on Thursday following a choppy session on Wall Street as traders weighed comments from Federal Reserve chair Jay Powell. Major indices notched declines of around 1% in the first hour of trading with recession fears front and centre. Oil edged up a tad off key support levels but remains close to yesterday’s six-week low. Copper plunged to a 16-month low on broad recession fears and particularly worries about a China slowdown due to Covid lockdowns. And Boris Johnson faces a big test with two by-elections in Yorkshire and Devon where the Tories are set for an absolute hammering.

European stocks and the euro did not react well to yet more concerning economic data from the Eurozone. The latest flash composite PMI for “showed a sharp loss of momentum in the German economy at the end of the second quarter. Falling exports acted as a drag, while there were also signs of domestic demand coming under pressure from heightened economic uncertainty and sustained strong inflation”. And German businesses reported their lowest confidence towards future activity for over two years. Momentum lost just as the ECB starts to tighten policy…can they continue to hike rates with the EZ economy on fire around them?

Powell’s comments didn’t particularly tell us anything new. Stock futures moved off their lows on the remarks, but the cash equity markets still ended the session lower. Couple of things to note. Firstly, he pointed out that inflation is much more of a demand issue in the US than elsewhere…so monetary policy should have a greater effect. Also, he noted that inflation was happening well before the Russian invasion – accurately countering the fake news being spouted by the White House. But the main takeaway was the same as before – the Fed is “strongly committed to bringing inflation back down” and a recession is a “possibility”. Yields fell with the 10yr yield plunging its most in seven months, back to 3.1% as of this morning. The 2yr holds above 3% – massive bear flattening move as investors bet on slower for longer growth which is feeding into lower equities. 

Musk…In a recent interview he revealed battery shortages and other supply chain problems were costing Tesla “billions of dollars”. I mean this should probably the kind of thing investors are told first through official channels instead of some interview with the Tesla Owners Silicon Valley that occurred in May and was only finally posted on YouTube on Wednesday. “Both Berlin and Austin factories are gigantic money furnaces right now … It’s really like a giant roaring sound, which is the sound of money on fire,” Musk said. 

He goes on…”How do we keep the factories operating so we can pay people and not go bankrupt?”. Laying off 10% of staff is one way but even mention of the B word should be raising red flags. This is material information about the company that should be saved for official filings. 

Elsewhere, the dollar is bid this morning with the risk-off tone to trade offering support to the greenback. Majors fell sharply at the start of European trading, with GBPUSD back below 1.22, with yesterday’s low at 1.2161. EURUSD also dived to test the near-term support at 1.050. The yen trades a tad firmer with USDJPY retesting 1.3510 having risen as high as 1.3670 this week.