<ul>
<li>European equities drop</li>
<li>Yields fall</li>
<li>UK inflation at 40-year high</li>
<li>All eyes on Powell Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com</li>
</ul>
<h3>IT’S A CYCLICAL BEAR MARKET (1015 GMT)</h3>
Analysts at Goldman Sachs view the current equity bear market as a cyclical one, driven by rising interest rates and recession fears, rather than being structural.
“We view this as a ‘cyclical’ bear market with stronger private sector balance sheets and negative real interest rates cushioning against many of the systemic risks associated with the longer and deeper ‘structural’ bear markets,” Goldman Sachs wrote in a note dated Tuesday.
Global equity markets have been fretting about a recession after major central banks aggressively raised interest rates to tame inflation fuelled by the Ukraine crisis and the reopening of the economy after the COVID-19 lockdowns.
Goldman Sachs on Tuesday forecast a 30% chance of the U.S. economy tipping into recession over the next year, up from 15% earlier.
A worrying concern is that the current recession is led by a supply shock, whereas virtually every recession in the last 30 years has been due to a demand shock, GS points out.
Goldman says a supply shock-led recession means that monetary policy is less potent, requiring more fiscal intervention, and these conditions are worrying at a time when bond yields are rising and debt/GDP ratios are high.
The current bear market will be different from previous stints as “inflation risks, scarcer resources and more regionalisation are likely to result in more capex and lower margins and returns for investors,” GS added.
(Siddarth S)
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<h3>EUROPE JUST 1% AWAY FROM CONFIRMING A BEAR MARKET (0850 GMT)</h3>
European bourses are plunging further into the red and getting closer to confirming a bear market.
The pan-European STOXX 600 (.STOXX) benchmark index is losing 1.7% and, at 401 points, it’s just 1% away from a 20% fall since its all time high of 495.46 points hit on January 4.
Regional benchmarks are also feeling the heat: France’s CAC 40 (.FCHI) is losing 1.9% and back to the lows hit in March at the height of the Ukrainian war stress.
Germany’s DAX (.GDAXI) , which has already confirmed a bear market this year and was last down 2.2% on the day, is also back to where it was closely after the start of Russia’s invasion of Ukraine.
Same goes for Italy’s FTSE MIB (.FTMIB) , taking a 2.3% hit this morning. Meanwhile, Switzerland’s SMI (.SSMI) briefly fell more than 20% from the record closing high it reached at the end of December last year.
(Julien Ponthus)
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<h3>FOOD AND BEVERAGE STOCKS RISE IN SEA OF RED (0821 GMT)</h3>
As signalled by earlier futures, the pan-European STOXX 600
(.STOXX) index is losing 1.64% this morning, reversing gains made over three positive sessions and touching its lowest level since February 2020.
On a sector basis food and beverages (.SX3P) is the only riser, up 0.1%, while all other sectors are falling with oil and gas (.SXEP) and basic resources (SXPP) both down 3.3%-3.5%.
The biggest riser is Natwest (NWG.L) , with shares moving 3% higher after the British government extended a trading plan to help sell down the taxpayer’s stake in the bank by a year
.
Shares in Umicore (UMI.BR) are the biggest losers on the STOXX 600, down 16.3% after it published its 2030 strategy
.
(Lucy Raitano)
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<h3>INFLATION PSYCHOLOGY (0712 GMT)</h3>
Rail strikes, the biggest in three decades, are thinning out office districts across Britain this week. Other professional groups, from barristers to postmen, also plan to hit the barricades in coming weeks to demand more pay .
Data on Wednesday shows why. Annual consumer inflation inched to a new 40-year high of 9.1% in May, heading for the 11% print the Bank of England forecasts by October.
It may heap pressure on the BoE to up its rate-hiking pace after its quarter-point move last week lagged more robust action from the U.S. Federal Reserve and others.
But sterling has fallen, keeping one eye on recession risks that could force the BoE to stay its hand in coming months. Indeed, UK manufacturers’ expectations for higher prices fell to a nine-month low in June, recent data shows .
The wage demands, replicated across Europe, reflect what European Central Bank chief economist Philip Lane called “inflation psychology”, where consumer behaviour perpetuates inflation.
And price pressures will force the Federal Reserve to opt for another 75 bps rate hike in July, then 50 bps in September, a Reuters poll predicts .
All eyes therefore are on Fed boss Jerome Powell, who will be on Capitol Hill later on Wednesday and again on Thursday to explain to Congress how he plans to tame inflation.
The fear of recession down the road is weighing on markets, reflected in falling bond yields, 10-year German and U.S. borrowing costs are down 7 bps. World stocks are sliding again and Wall Street futures are down more than 1%, threatening to reverse Tuesday’s firm close.
Yields spreads between Germany and southern Europe narrowed on Tuesday after ECB president Christine Lagarde reaffirmed this week a commitment to avoid “fragmentation”. But markets want to see action soon on that, especially after Lane said a 25 bps ECB hike was set in stone for July. Key developments that should provide more direction to markets on Wednesday: -ECB’s Frank Elderson, vice-president, Luis de Guindos speak -Philadelphia Fed President Patrick Harker, Richmond Fed President Thomas Barkin, Chicago President Charles Evans speak -Czech National Bank seen raising rates by 100 bps -U.S. mortgage rate -U.S. Treasury auctions 20-year bond
(Sujata Rao)
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<h3>BACK TO REALITY?: (0623 GMT)</h3>
After three positive sessions, screens are flashing red this morning for European stocks as attention turns back to soaring inflation and interest rate hikes.
Future contracts for the STOXX 50 (.STXEc1) , DAX (.FDXc1) and FTSE (.FFIc1) are all falling between 1.2%-1.6%, wiping out the 1.4% the STOXX 600 (.STOXX) in the last few days.
The market woke up to news that UK inflation hit a new 40-year high last month, with soaring food prices pushing British consumer price inflation to 9.1%
Traders will be watching Federal Reserve Chair Jerome Powell’s testimony to Congress later today, as they look for further clues on how aggressively the Fed will hike rates at its July meeting and beyond.
Recession fears are continuing to blaze this week. On Tuesday Goldman Sachs upped the chance of a U.S. recession over the next year to 30% chance, from the previous 15%. Meanwhile Germany faces certain recession if faltering Russian gas supplies stop completely, an industry body warned on Tuesday.
(Lucy Raitano)
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UK US EZ CPI
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