IMF downgrade hurts sentiment
The IMF lowered its growth forecast for the global economy from 2% to 1.2%, in addition to that it also downgraded next year’s outlook to 0.8% from 2.1%. The inflation forecast for this year is 7.7%, and the prediction for 2023 has been lifted to 4.8% from 3.5%. The bleaker outlook was not a surprise, but it has weighed on sentiment. This morning, European stock markets were showing strong gains as the rally in the US last night boosted the mood, but the renewed worries about potential gas shortages in Europe and the IMF report pushed stocks into negative territory. According to the IMF, energy shortages could knock 5% off German GDP. As a precaution, EU leaders are drawing up plans to reduce gas consumption by 15% between early August and late March 2023. The EU’s tough stance against Russia because of its invasion of Ukraine has put Brussels and Moscow at loggerheads. Even before Gazprom announced it will not be able to fulfil its gas obligations, there was already minor concern that Germany could be on track for a recession, but now those fears have ticked up. When you consider the challenges facing Germany, it is odd the DAX is only 0.2% lower.
US indices are building on last night’s gains as Netflix share are up over 4% as the company delivered well-received quarterly results last night. The streaming service lost 970,000 subscribers but equity analysts were predicting a decline of 2 million. In a sign of confidence, the firm announced it would add 1 million net users this quarter. The S&P 500 has hit its highest level in nearly six weeks, so that highlights the bullish mood in the US. Traders are a little less worried about the possibility of the Fed hiking rates by 100-basis points this month, and that is assisting equities too.
The US dollar index has snapped its three-day losing streak as the US 10-year yield is marginally above the 3% level. The fact the greenback is up only 0.2% higher after falling from 1.0900 to 1.0611, indicates that demand is lacklustre. Gold is a touch lower on account of the recovery in the US dollar, it does not help the metal that US stocks are rallying as lower risk assets often underperform in risk-on sessions.
Oil saw a jump in volatility following the release of the EIA report as US oil inventories fell by 445,000 barrels, which was a big surprise considering the forecast was for a build of 2.1 million barrels. Gasoline inventories increased by 3.49 million barrels, which could be a sign that demand is fading.
