Concerns about recession keep markets out of balance when interest rates fall

Tthe fragile nature of this week’s recovery has been revealed today, with a sharp drop in Asian oil prices spreading to a broader market weakness, with the DAX falling below last week’s lowest levels before returning, while the FTSE100 has also slipped sharply back.

Europe

Today’s inflation figures from the UK came to seem rather mixed in the same way as the US inflation figures a few weeks ago, when core prices became softer, but PPI prices continued to push higher, suggesting that there is still a lot of price pressure in pipeline.

These concerns have also given rise to weakness in metal prices with another sharp drop in copper, which has fallen to new one-year lows, and its weakest levels since March 2021, as concerns about an impending global downturn increase.

Bond yields have fallen sharply as money moves into government bonds and other refuges with gold prices have also risen higher.

Not surprisingly in light of today’s weak commodity prices, the worst results have been e.g. Glencore, Antofagasta, BP and Shell.

Ocado equities continue to weaken in the wake of yesterday’s ranking, with some investors a little nervous that it may not be the last, as the outlook for profitability continues to be pushed further out.

House builder Berkeley Group equities have also fallen sharply despite posting a decent set of figures for the full year. Revenue rose 6.6%, above the £ 2.35bn consensus forecast, while pre-tax profit rose 6.4% to £ 551.5m. The house builder says it still aims to deliver a pre-tax profit of £ 625m. in 2024/2025, starting with around £ 600m. in the coming tax year. Forward sales are currently at DKK 2.17 billion. GBP, an increase of 27% over the same period a year ago.

JD Sports has finally started publishing its full-year results and reports revenue of £ 8.56bn. in line with expectations, while pre-tax profits more than doubled and rose to a record high of £ 654.7 million, pushing equities to the top of the FTSE100.

The delay in the figures was due to auditors having to assess the impact of the effect of the sale of Footasylum. For 2023, the company said it expected profit before tax to be at a similar record level as this year, focusing right now on securing the recruitment of a new CEO with the departure of Peter Cowgill.

U.S

U.S. markets opened up a lot on the hind legs, taking their cues from the negative sentiment stemming from today’s European session and falling oil prices, though the Nasdaq is holding up better than its peers, helping pull stocks out of today’s lows.

Fed Chairman Jerome Powell’s comments on central bank policy have not changed the calculation when it comes to the Federal Reserve’s future interest rate intentions, as he fends off various party policy issues on food and energy prices from both sides of the political divide.

His testimony appears to be dragging US markets out of their lows, but the rise continues to remain fragile as investors offset the dual risks of a global downturn against central banks overplaying their hand and tipping the economy into recession.

This seems to be a futile hope given that some form of recession or slowdown is inevitable, no matter what central bankers may say in public. The only question is about the degree of difficulty depending on where you are.

Moderna shares are higher on reports that the new vaccine candidate is showing good efficacy against various Omicron variants, as well as reports that it has signed a new £ 1bn deal. with the UK.

FX

The US dollar is on the rise again, although the Japanese yen is taking a bit of a break after hitting a new low of 24 years earlier today.

The weakness in commodity prices is hurting people like the Australian and Canadian dollars, which have come under pressure, even though the big jump in Canada’s CPI to 7.7% has pulled the shit out of today’s lows.

The pound is on the back end after the CPI rose to 9.1% in May, and another record high, although core prices fell back to 5.9%. Despite the fall in core prices, all other targets, including RPI and PPI, showed little sign of a slowdown in underlying price pressures, with PPI input prices jumping above 20% and rising further in May to a new record of 22.1%.

There have been some straws because core prices have fallen back, but food and energy prices show little sign of declining, and that is ultimately what consumers worry about, no matter what economists may say.

Raw materials

Crude oil prices are back on track again as concerns about a global downturn seem to outweigh any concerns over supply problems stemming from Russia’s invasion of Ukraine and the prospect of Chinese demand returning. Although the concerns about Chinese demand could well be offset by the fact that they are likely to be able to pick up all their needs from Russia, as they do not comply with many of the sanctions imposed by the US and the EU when it comes to their own energy needs.

Copper prices have also resumed their downward track and have fallen to 15-month lows for the same reason. Despite concerns about a cut in supply from Chile, it has not been enough to stop the decline, with the US dollar helping to push up prices.

Gold prices have received a bid for the reverse of the fall in both interest rates and stock markets, but have not been able to move much beyond the highs of recent days.

Volatility

Interest in the Rank Group remained high during yesterday’s session following Monday’s gloomy outlook. Net loss on the day was less than 1%, but with stock trading in a range of close to 10%, which served to leave the daily volume at 321% against 172% on the month.

Soft commodities experienced downward pressure at the resumption of trading yesterday after a three-day weekend in the US. Maize traded down to a low for two weeks, while soybeans fell to levels not seen in five weeks, increasing daily volume here to 52% and 37% respectively. However, even higher activity levels were seen in the Agricultural Mix Index. This represents a dozen crops, but is dominated by corn and soybeans, with a daily volume of 58% versus a monthly reading of 32%.

Fiat currencies look relatively calm after last week’s increase in activity, but cryptocurrencies continue to experience an increased price action with Litecoin of 212% on the day against 124% on the month as it returned some of its gains.

Finally, the proprietary CMC Oil & Gas Index had a good start to the shortened trading week, with all of Friday’s losses catching up in the early part of the day. All 10 ingredients were up on the day, but this basket has dropped by about 20% over the last two weeks. Daily vol was at 108% against a comparison of 75% for the month.

Disclaimer: CMC Markets is a performance-only service provider. The material (whether or not it states any opinions) is for general information purposes only and does not take into account your personal circumstances or goals. Nothing in this material is (or should be considered) financial, investment advice or other advice that one should trust. No statement given in the material constitutes a recommendation by CMC Markets or the author that a particular investment, security, transaction or investment strategy is appropriate for a particular person. The material has not been prepared in accordance with legal requirements designed to promote the independence of the investment analysis. Although we are not specifically prevented from acting before we deliver this material, we do not seek to take advantage of the material until it is disseminated.

Leave a Comment