Recession fears & hawkish Fed chatter pull stocks lower – Daily Market Brief, August 24, 2022

The DAX is pointing to a 0.4% fall on the open in cautious trade after weak PMI data fuels recession fears and hawkish Fed comments direct Jackson Hole expectations.

·         EUR/USD fails to regain parity bringing 0.99 back into focus

·         Gold resumes its decline as the USD rebounds and, central bankers head to Wyoming

·         Oil holds onto yesterday’s gains after Saudi Arabia suggests oil output cuts

PMI data

The latest PMI data painted a grim picture. In Europe,  PMIs contracted for a second straight month amid ongoing supply chain disruptions and as consumers reined in spending as interest rates rose and the cost of living crisis deepened. In the UK, growth stalled as growth in the service sector was offset by a sharp fall in manufacturing activity.

In the US, the data showed that the US economy appears to be faring worse than initially thought. While manufacturing saw some growth, the service sector contracted sharply to a 2-year low. New home sales also tanked -12.1% to a 6-year low. Like their European peers, US stocks also ended the day in the red.

EUR/USD

In the FX market, the USD fell sharply after the disappointing PMI data. However, notably, EUR/USD failed to regain parity. The pair is falling again ahead of the European open as risk-off dominates, bringing 0.99 back into focus.

Stocks in Europe and the US are set for further losses today, hurt by the prospect of an imminent recession in Europe and by more hawkish commentary from Fed officials. The DAX is set to open -0.4% lower, and S&P 500 futures trade -0.15% lower.

Fed hawks

Minneapolis Federal Reserve Bank President Neel Kashkari is the latest Fed official to reiterate the Fed’s focus on bringing down inflation. The biggest risk right now is underestimating the extent of price pressures. While cool CPI data had boosted hopes of a dovish pivot at the Jackson Hole Symposium, this is now looking highly unlikely. That’s not to say that stocks can’t still push higher, but the market will want to see at least a slight softening of the Fed’s hawkish stance.

Gold

Gold rose 0.6% yesterday, snapping a six-day losing streak as the weaker PMI data caused investors to rein in aggressive Fed bets, albeit temporarily. Today the precious metal is edging lower again towards the monthly low as central bankers head to the mountains. Fears of a hawkish Federal Reserve keep the USD supported and non-yielding Gold under pressure. Gold has lost almost all of its gains this year as the USD strengthened and US interest rates rose. The next key catalyst from the yellow metal will be Jerome Powell’s speech, which could provide more cues on the direction of monetary policy.

Oil

Oil jumped just shy of 4% yesterday after Saudi Arabia floated the possibility of cutting output, catching the market off guard. Saudi Arabia cited concerns over the recent fall in oil prices as the motive to slash production, after prices fell from around $120 per barrel to $90 in recent weeks. The comments appear to have put a floor under oil prices, but unless they are followed through by some action, the impact on the market will likely fade. Oil prices are holding steady today, over $93.50 at a 10-day high.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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