Daily Market Comment – Yen gets some relief as dismal PMIs fan recession fears

  • Gloomy business surveys from Europe and US add to market nerves
  • Yen and gold come out on top as Fed rate path is recalibrated lower
  • Stocks retreat after Snapchat warning, flurry of earnings coming up

Recession worries

There has been a tectonic shift in global markets this month, with concerns around an impending recession overshadowing inflation as the main threat to the outlook. This was reaffirmed by the latest business surveys from Europe and America, which were an absolute horror show, signaling that both economies are already in contraction as demand has started to lose power. 

The world economy is slowing down at a dramatic rate now that the fiscal and monetary stimulus is rolling off while the cost of living crisis bites consumers, sending traders scrambling to recalibrate the trajectory of the Federal funds rate lower. Bond markets are still confident the Fed will deliver a triple-barrelled rate increase this week but the terminal rate has been revised down to 3.40% and rate cuts are expected to begin early next year. 

The prospect of a downturn that cuts short the tightening cycle of central banks around the world came as music to the ears of the Japanese yen, which has been devastated by the Bank of Japan’s refusal to consider tighter policy. The loss of Japan’s trade surplus amid soaring energy prices has also been a huge factor, so the latest retreat in crude oil added fuel to the yen’s relief rally. 

FX market and gold

Aside from the yen, the reaction in the broader FX complex was not so straightforward. Most major pairs had a volatile session but closed almost unchanged. The euro went for a ride, losing ground initially after the dismal European PMI readings, although it managed to recover later on as the equally-grim US numbers knocked the wind out of the dollar. 

It’s a huge week ahead for the dollar, with a Fed rate decision on Wednesday and the latest GDP report on Thursday that will reveal whether America is in a technical recession already. There are mixed signals on this front as Wall Street economists expect a positive number while the Atlanta Fed GDPNow model points to a sharp decline, raising the stakes for traders. 

In the commodity sphere, gold bounced back. Bullion found fresh buy orders near the critical $1680 region last week and came back with a vengeance, as growth worries torpedoed bond yields and the dollar finally lost some steam. With markets transitioning to a paradigm where recession is public enemy number one and inflation loses its punch, gold might manage to stabilize, although any trend reversal will likely have to wait until the Fed hits the pause button. 

Snapchat spoils party in stocks

Alarming business surveys and a disastrous earnings report from Snapchat (-40%) sent shivers through the equity market on Friday, hitting ad-focused businesses like Google (-5.6%) and Meta (-7.6%) particularly hard. Even though Snap is much smaller and caters to an entirely different demographic, traders are cutting positions first and asking questions later, worried this might be the canary in the mine for the cyclical advertising sector. 

Overall, Wall Street has been caught between two minds lately. The ongoing growth scare has investors worried about imminent earnings downgrades, yet fading expectations for Fed rate hikes have provided a cushion for equity prices, and earnings have been better than feared so far.

The decisive vote will be cast by the tech juggernauts, most of which will announce their results this week, starting with Microsoft and Google tomorrow.

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