Fears that aggressive rate hikes by inflation-fighting central banks around the globe could lead to a recession theme are broad-based, and the relief in global stocks this week, reversing the losing streak from the worst week since the pandemic throes in 2020, is likely to be short-lived as traders return to Wall Street after a long weekend.
Investors’ sentiment and trading strategies show the path of least resistance for global risks assets being downside.
“It is, of course, very quiet, thanks to the US holiday yesterday, so there is nothing on the equity front to report, or Treasuries either. For what it is worth, which may not be very much, US equity futures are currently positive…though it’s anyone’s guess if that’s how it looks tomorrow morning after a day’s trading,” said Robert Carnell, Regional Head of Research for Asia-Pacific at ING.
“Asian equity futures look cautiously optimistic this morning in anticipation,” he added.
Indeed, US share futures and Asian stocks turned higher on Tuesday as the markets paused and took stock after a recent steep selloff. Still, concerns remain that aggressive tightening to curtail decade-high inflation could spark a global recession.
“I think the green that we’re seeing this morning is not necessarily a function that people are moving back in towards risk assets,” Kerry Craig, global market strategist at JPMorgan Asset Management, told Reuters.
“It’s just the normal behaviour on the very large selloff to get some reprieve and breathing space come through because fundamentally, nothing has changed on the macro front last week.”
With the broad themes still in play and battered and confused investors remain uncertain, especially after the magnitude of the meltdown from last week, similar to financial markets’ reaction to fears of a global economic recession from the pandemic in 2020, which was more or less accurate.
What is clear is that investors are bracing for more bold action and, in some cases, unprecedented tightening moves.
While Indian equity benchmarks have staged a rebound so far, after having lost the entire worth of Reliance’s market capitalisation in just six days, there has been nothing in the domestic calendar to drive the markets.
Reserve Bank of Australia (RBA) Governor Philip Lowe, who pointed in a speech to further rate hikes, was the latest to weigh in on higher borrowing rates sentiment.
“As we chart our way back to 2 to 3% inflation, Australians should be prepared for more interest rate increases,” Mr Lowe warned. “The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation.”
Oil prices swung higher with traders focusing on tight supplies over slowing global economic growth, with Brent crude still elevated above $110 per barrel.
What is likely to further dent global sentiment is the US plans to impose further sanctions on Russia for its invasion of Ukraine, underscoring sentiment the war on the edge of Europe is not likely to abate anytime soon.
Indeed, a Reuters report showed that Treasury Secretary Janet Yellen said on Monday that the United States is in talks with Canada and other allies globally to further restrict Moscow’s energy revenue by imposing a price cap on Russian oil without causing spillover effects to low-income countries.