Global financial markets have been ravaged by fears that more aggressive interest rate hikes by major central banks to tackle decades-high inflation could tip global economies into recession.
The recent rise in risk assets appears to be a pause before the fall and a clear indicator of high volatility on differing views on the economic impact.
But overall the bears are winning this round, with the bulls surfacing underwater every now and then to take a breather.
“We’re seeing a slight drop in yields, a bit of safe haven buying, which suggests that markets may be starting to worry about some form of slowdown,” chief equity analyst Michael Hewson told Reuters. markets at CMC Markets.
He added that these concerns were rippling through copper and oil prices, causing some weakness in equity markets. “A downturn is coming, and it’s really a matter of degree.”
The MSCI All-Country Share Index is down more than a fifth this year and was down on Thursday. Asian and European stocks fared no better, except for a relief rally since Monday after global stocks suffered their worst week since the sharp drop caused by the pandemic.
The STOXX stock index of 600 European companies fell to a new low for the year, and futures trading on the Nasdaq and S&P 500 pointed to a weaker open.
Copper and crude oil prices fell on demand concerns over the global slowdown and spending restraint.
“Copper has always been the leading indicator of economic growth,” said Patrick Spencer, vice president of equities at Baird Investment Bank.
U.S. Treasury yields fell after Federal Reserve Chairman Jerome Powell, in testimony before the Senate Banking Committee, underscored the central bank’s commitment to reducing inflation at all costs and acknowledged that a recession was “certainly a possibility”.
With the Fed widely forecasting another 75 basis point interest rate hike in July, and many more before the end of the year, investor sentiment has deteriorated.
Fed Chief Jerome Powell will give his second day of testimony to Congress later Thursday.
Spencer de Baird said stock markets had been so damaged that they had already widely discounted a recession.
“If you look at the data, I think at worst what you’re looking at is maybe a mild recession. I think the markets are in a bottoming process, and maybe you only have 5% further reduction.”
Worries about the outlook for demand undermined commodity prices, as oil fell Thursday to its lowest in more than a month. Brent crude fell more than 1.7% to below $110 a barrel.
Iron ore was already at a six-month low, having lost more than 20% in recent weeks, while copper hit a 15-month low overnight.
The dollar appreciated against a basket of major currencies, with the index rising 8% for the year, reflecting general risk aversion sentiment and the dollar’s yield advantage driven by the Fed.
Gold was slightly lower, with spot prices trading at $1,837 an ounce, little change during the day.