Stocks and oil stumble as recession fears mount

LONDON (Reuters) – Global stock markets and oil prices fell on Wednesday as the constant flickering over interest rate hikes and recessions resumed, while the Japanese yen hit a 24-year low against the seemingly unstoppable US dollar.

The enthusiasm that gave Wall Street its best day in more than a month on Tuesday abruptly faded as Europe opened 1.5% lower and Brent crude prices fell 4% after an Asian session that was also dovish.

Enthusiastic dollar bulls took no prisoners either on the bets that Federal Reserve Chairman Jay Powell would later repeat to Washington on the need to raise US rates hard and fast.

In addition to exacerbating the yen’s problems, it sent the euro down 0.3%, the oil-sensitive Norwegian crown slipping 1.3% and the pound sterling down 0.7% as data confirmed that inflation there is now at a 40-year high of 9.1%. Read more

“It is remarkable how quickly the market has turned around again after the slight pressure in sentiment yesterday,” said John Hardy, Saxo Bank’s forex strategist.

“It seems that the commodity market is calling for a (global) recession,” he added. “And the dollar is heading towards strength as a safe haven.”

These recession fears also emerged in the bond markets as US and German government bond yields fell as traders sought out traditional safe havens.

The yield on the benchmark US 10-year Treasury fell to 3.233% while the 10-year yield in Germany fell 7 basis points to 1.692%, after hitting its highest level since January 2014 at 1.928% last week.

But the differences between debt-laden Germany and Italy widened again. Its foreign minister, Luigi Di Maio, said he would leave the Five Star Movement to form a new parliamentary group supporting the government, a move that threatens to destabilize Prime Minister Mario Draghi’s coalition. Read more

Overnight, MSCI’s broadest index of Asia Pacific shares outside Japan (MIAPJ0000PUS.) It fell 2.3 percent, close to a five-week low. Hong Kong-listed tech heavyweights fell more than 4% (.HSTECH) Although the Nikkei in Tokyo (.N225) It managed to keep its losses at only 0.4%.

Investors continue to assess how worried they are about the possibility of central banks driving the global economy into recession as they try to rein in severe inflation while raising interest rates.

Major US stock indices rose 2% overnight on the prospect that the economic outlook may not be as dire as thought during trading last week when the S&P 500 was. (.SPX) It recorded the largest weekly percentage decline since March 2020.

But the rally in Wall Street sentiment doesn’t look like it will continue with S&P 500 and Nasdaq futures contracts, both down nearly 1% on Wednesday.

“I think this latest post-holiday bear market rally is a reflection of investor uncertainty as to whether or not we saw peak inflation and Fed tightening — I think we are close,” said Invesco global market strategist for Asia-Pacific David Chao.

US Federal Reserve Chairman Jerome Powell is set to testify before Congress on Wednesday with investors looking for more clues about whether a 75 basis point interest rate hike in July is imminent.

Economists polled by Reuters expect the Federal Reserve to raise interest rates by 75 basis points next month, followed by a half percentage point rise in September, and not fall back to a quarter of a percentage point until November very early. Read more

Most other global central banks are in a similar position, with the exception of the Bank of Japan, which pledged last week to maintain its ultra-low interest rate policy. In contrast, the Czech Central Bank was expected to raise interest rates by 125 basis points later with inflation there to double digits.

That gap between low interest rates in Japan and higher US interest rates weighed on the yen, which hit a new 24-year low of 136.71 per dollar in Asian trading, before drifting further to 136.20.

The Bank of Japan’s monetary policy meeting minutes released on Wednesday that were released on Wednesday showed the central bank’s concerns about the impact of a depreciating currency on the business environment in the country. Read more

The other big move was in the commodity markets. A source familiar with the plan told Reuters that the 4 percent drop in oil prices came amid fears of a recession, and US President Joe Biden on Wednesday expected to call for a temporary suspension of the 18.4-cents-a-gallon federal tax on gasoline.

Brent fell five dollars to 109.79 dollars a barrel, while US crude fell 5.9 percent, or 5.37 dollars, to 104.15 dollars.

PVM’s Stephen Brennock said, noting the expected higher summer demand.

Additional reporting by Sam Byford in Tokyo and Shadia Nasrallah in Bengaluru

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