- Stocks in recovery mode despite hawkish Fed minutes, which spur yields higher
- Lower commodity prices might be aiding sentiment as WTI falls below $100
- Pound catches a bid on speculation PM Johnson is about to resign
Recession gloom eases as stocks edge up
The cloud has started to lift slightly over the markets even as recession risks remain elevated and worries about overtightening by the Fed and other central banks persist. The broad pullback in government bond yields appears to be somewhat eclipsing this week’s inversion in the two-year and 10-year Treasury yields, and this is encouraging some buyers back into equities.
Following the recent deterioration in US and European PMIs, market pundits have sharply lowered their expectations for growth, with a steep slowdown now looking inevitable even if a full-blown recession is not entirely set in stone just yet.
The minutes of the Fed’s June policy meeting published yesterday cited some concerns by FOMC members about the growth outlook but indicated no hesitation about moving to a “restrictive stance”, which they considered was necessary to meet their inflation goal.
Treasury yields reversed higher after the minutes were released and the 10-year yield is approaching 2.95% today. But stocks remain buoyant, with US futures pointing up.
The S&P 500 closed up for a third straight day on Wednesday and European shares are also extending their gains today. An upbeat set of results by electronics giant Samsung in its preliminary earnings report this morning sparked a rally in tech shares, raising hopes that the upcoming season won’t be as dreadful as many are fearing.
Plunge in commodities offers relief
However, another factor behind this rebound is the current unwinding of the rally in commodities. In particular, agricultural commodities such as wheat and corn, which surged from the war in Ukraine, have pulled back significantly, with wheat even erasing all its gains. But industrial metals like copper that had been boosted from the post-Covid demand surge and supply constraints have nosedived over the past month as recession fears have intensified, weighing on the demand outlook.
Crude oil has not been immune to this selloff and the only outlier has been natural gas. WTI and Brent crude futures are down about 20% from their highs in June. Prices are slightly firmer today but WTI’s drop below $100 a barrel has taken the shine off oil in the near term.
Oil supply continues to be tight so there may not be much further downside left. But for now, the aggressive retracement is fuelling speculation that inflation is plateauing and interest rates will peak sooner and at a lower point than previously anticipated.
Euro barely recovers as dollar index hits 107
A rebound is also underway among the riskier currencies such as the pound and commodity-linked dollars, though the euro struggled to make much headway.
The euro’s freefall has pushed the dollar index above the 107 level for the first time since December 2002. Worries about a recession have also boosted the Japanese yen, though both safe havens were softer on Thursday.
The single currency is edging ever closer to parity with the dollar after tumbling to a 20-year low of $1.0160 yesterday. ECB rate hike bets have been sharply pared back as investors are increasingly pessimistic about the Eurozone economy following the latest spike in natural gas prices and fears about Russian supply being cut off.
There may be some support for the euro, however, from the ECB’s June meeting account, which is due later today and will likely be hawkish.
Pound lifted by Boris Johnson’s expected exit
The darkening outlook has also dragged sterling to new depths, but the British currency has perked up today on expectations that there will soon be an end to the political uncertainty engulfing Westminster these last few weeks.
Prime Minister Boris Johnson’s authority collapsed yesterday after a slew of ministers and cabinet members followed the former finance and health ministers, Rishi Sunak and Sajid Javid in resigning. Johnson has been hit by a string of scandals over the past year, slowly losing the support of the parliamentary party. After refusing to go last night, Johnson is widely anticipated to quit at any moment now.
The pound spiked to $1.1994 on the reports that Johnson has decided to stand down. Investors are likely hoping that a new Conservative leader and a new government will be able to do a better job in steering the country through the cost of living crisis, as well as potentially improve relations with the EU.