Daily Wrap Up 05 July 2022

5 Jul 2022 04:34 PM

Recession fears rattle markets

The bears have emerged now that US traders are back in action following their long weekend because of the Independence Day holiday yesterday. Fears about the health of the world economy are circulating and that is why we are seeing major declines in stocks, energies, and industrial metals. Worries about rising inflation, higher interest rates and slower economic growth are hanging over the markets. Sentiment across the board is slowly souring by the day as there are more and more headlines a possible recession. It wasn’t that long ago that government bond yields were rising to multi-year highs in anticipation of further rate hikes, but now yields are falling, which reflects the risk-off environment.

EUR/USD is trading below 1.0300, its lowest level since 2002. A combination of euro weakness and US dollar strength is driving the currency pair down. The final reading of the eurozone services PMI reading showed the services sector in the bloc grew at its slowest pace in five months. As far as the euro area is concerned, fears continue to linger about the region’s dependency on Russian energy, and there are worries that Germany could be on track for a recession. On the other side of the coin, the US dollar is driving higher as traders are seeking out safe haven currencies. The US faces its fair share of problems, but it seems as if the UK and the eurozone have larger stumbling blocks ahead of them.

The Reserve Bank of Australia hiked rates by 50 basis points, meeting expectations. The lift was clearly signalled by the RBA, there was even some whispers the bank would reveal a 75 basis points lift. It is possible the measured language that accompanied the hike is why the “Aussie” is lower, after all, the Fed caught some by surprise last month when it announced a 75 basis points lift. Copper has tumbled to a 17-month low due to fears about global demand and that is weighing on the Aussie dollar.

The Swiss franc is deemed to be a safe haven currency and it is in high demand due to worries about the health of the global economy. There is speculation the US, the UK and Germany could be on track for a recession, and in turn that is hammering stocks, energies, and industrial metals. Dealers are keen to seek shelter in assets that are deemed to be lower risk, like the “Swissy”. Yesterday it was confirmed that Swiss inflation jumped from 2.9% to 3.2%, topping the 3.1% forecast. While CPI continues to climb, that makes additional Swiss National Bank rate hikes more likely, which feeds into the narrative of the firmer Swissy.

Gold usually rallies when equities are falling but the strength of the greenback has hurt the metal. WTI and Brent crude are even coming under pressure today despite the supply issues. There are increasing worries the elevated energy prices will chip away at demand, hence the fall in the oil contracts.

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