Recession fears hammer stocks lower – Daily Market Brief, July 1, 2022

There is no stopping the selloff this week. European stocks are heading for another deeply negative open after heavy losses in the previous session and on Wall Street.

·         Recession fears put stocks in line for a steep weekly loss in the US & Europe

·         Eurozone inflation to rise to a record high of 8.3% YoY in May

·         US ISM manufacturing to tick lower reflecting slower growth

Recession fears continue to grip the market at the start of the new quarter. Worries that central bankers would aggressively hike rates to tame soaring inflation, resulting in a recession, sent the S&P500 steeply lower across the second quarter and prompted the worst first-half performance since 1970.

While equity markets are plunging lower, there are some signs that the bond markets could be stabilizing. Signs of peak inflation and weaker growth have helped the bond market steady. The 10-year yield is back down below 3%.

Yesterday US Core PCE fell for a third month, indicating that raging inflation is starting to cool. PCE declined to 4.7% YoY in May, down from 4.9% in April and 5.2% in March.

While the data shows inflation is cooling, this is unlikely to prompt the Federal Reserve to adjust its increasingly hawkish stance; the stance which threatens to tip the US into recession.

Recession fears are by no means isolated to the US. In fact, given the stagnant growth in the UK and Europe, the possibility of a recession this side of the Atlantic is significantly higher. With growth stalling and ECB Governor Christine Lagarde vowing to go as far as necessary to tame inflation, a recession looks almost unavoidable.

The FTSE closed yesterday 1.9% lower and is set to extend the decline falling a further 1% on the open. Meanwhile, the DAX closed 1.6% lower and is pointing to a 1.3% drop on the open. The DAX is set to lose 3.5% across the week.

Eurozone inflation

The focus today will be on Eurozone inflation data which is expected to show that inflation climbed to 8.3% YoY in June, up from 8.1% in May and a new record high. Hot inflation could pile pressure on the ECB to act more aggressively to tame inflation. The ECB is expected to raise rates by 25 basis points in July, and a 50 basis point rate hike in September seems increasingly likely.

EUR/USD trades lower, heading into the European open, falling to 1.0450.

Looking ahead

Looking towards the US open US manufacturing PMI for June, which is expected to slip to 55, down from 56.1 in May, reflecting slower growth and lower expectations in the sector. The level 50 separates expansion from contraction. The indicator also provides insight into the jobs position and also inflationary pressures.

Gold

Gold is extending its losses for a fifth straight session and falls below the key psychological level of $1800. The yellow metal is set to drop 1.6% this week as escalating hiking bets and recession fears boost the USD. The key catalysts for gold today will be eurozone inflation data and US ISM manufacturing PMI.

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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