Rates and recession fears push markets back on the ropes

London — World stock markets and oil prices hit the skids on Wednesday as the persistent palpitations about rising interest rates and recessions struck again, while the Japanese yen hit a fresh 24-year low against a seemingly unstoppable US dollar.

The enthusiasm that had given Wall Street its best day in over a month on Tuesday gave way as Europe opened 1.5% lower and Brent crude prices plunged 4% after what had also been a downbeat Asian session.

Fired-up dollar bulls weren’t taking any prisoners either on bets that the head of the Federal Reserve, Jerome Powell, would repeat the need to jack up US rates hard and fast in testimony to Congress later on Wednesday.

As well as compounding the yen’s woes, it knocked the euro down 0.3%, while Norway’s oil-sensitive krone slumped 1.3% and Britain’s pound dropped 0.7% as data confirmed inflation there is now running at a 40-year high of 9.1%.

“It’s remarkable how quickly the market has turned again after that little squeeze up in sentiment yesterday,” said Saxo Bank FX strategist John Hardy. “The commodity market seems to be calling a [global] recession,” he added. “And the dollar is pivoting to strength as a haven.”

Recession worries were also showing in the bond markets, where US and German government bond yields fell as traders sought out traditional ports in a storm.

The yield on benchmark US 10-year Treasuries fell to 3.233% while Germany’s 10-year yield dropped 7 bps to 1.692%, after reaching the highest since January 2014 at 1.928% last week.

But the spreads between Germany and highly-indebted Italy widened again. Its foreign minister Luigi Di Maio said he was leaving the Five Star Movement to form a new parliamentary group that would back the government, a move that threatens to bring fresh instability to Prime Minister Mario Draghi’s coalition.

Overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan slumped 2.3% to close to a five-week low. Heavyweight Hong Kong-listed tech firms plunged more than 4%, though Tokyo's Nikkei managed to keep its losses to just 0.4%.

Investors are continuing to assess the extent to which central banks could  potentially push the world economy into recession as they attempt to curb red-hot inflation with interest rate increases.

The main US share benchmarks rose 2% overnight on the possibility that the economic outlook might not be as dire as thought during trade last week when the S&P 500 logged its biggest weekly percentage decline since March 2020.

But the lift in Wall Street sentiment didn’t look set to last either, with S&P 500 and Nasdaq futures both down nearly 1% on Wednesday.

“I think that this recent post-holiday bear market rally is a reflection of the uncertainty that investors have regarding whether we have seen the peak of inflation and Fed hawkishness or not — I think we're close,” said David Chao, Invesco global market strategist for Asia-Pacific.

Powell is due to start his testimony to Congress on Wednesday with investors looking for further clues about whether another 75 bps rate hike is on the cards in July.

Economists polled by Reuters expect the Fed will deliver a 75 bps hike next month, followed by half a percentage point in September, and won’t scale back to 25 bps moves until November at the earliest.

Most other global central banks are in a similar situation, apart from the Bank of Japan, which last week pledged to maintain its policy of ultra-low interest rates. In contrast, the Czech central bank was expected to hike its rates by 125 bps later with inflation there well into double figures.

That gap between low interest rates in Japan and rising US rates has weighed on the yen, which hit a new 24-year low of 136.71/$ in Asian trading before drifting firmer to 136.20.

Minutes from the Bank of Japan’s April policy meeting released on Wednesday show the central bank’s concerns about the impact the plummeting currency could have on the country’s business environment.

The 4% slump in oil prices came amid the recession concerns and with US President Joe Biden expected to call for a temporary suspension of the 18.4c/gallon federal tax on petrol, a source briefed on the plan said.

Brent dropped $5 to $109.79 a barrel, while US crude fell 5.9%, or $5.37, to $104.15.

“The latest in a long line of attempts to temper surging prices at the pumps is having the desired effect. Whether this knee-jerk reaction will stand the test of time is by no means guaranteed,” said PVM’s Stephen Brennock, pointing to an expected summer demand surge.

Reuters