Selling eases slightly in global markets on comment by US Fed

London — World stocks attempted a move higher on Friday after four days of losses caused by mounting fears of economic downturn, even though the growth concerns were fanned further by data showing a sharp slowdown in China.

Markets enjoyed some relief from selling after two Fed policymakers on Thursday hosed down bets on an aggressive 100 basis-point (bps) interest rate rise later in July.

But they did not dispel fears that central bank’s drive to get on top of galloping inflation would wallop the global economy.

Recession fears were fanned further by data showing a sharp second-quarter slowdown in China, reflecting the colossal hit from widespread Covid-19 lockdowns. Annualised 0.4% growth was the worst since at least 1992, excluding early-2020 when the Covid-19 pandemic erupted.

The data sent Chinese shares 1.7% lower and dragged an Asian ex-Japan index to two-year lows, while signs of property sector stress weighed on Hong Kong-listed developers.

“The recession angle is becoming stronger, backed by data showing things are cracking underneath the surface,” Salman Ahmed, global head of macro at Fidelity International.

He was referring to weakening economic data almost everywhere, contrasting with high inflation and tight labour markets.

“We moved rapidly from a stagflationary set-up to more of a recession-dominated one, and very strong inflation is adding to fears that the Fed will need to do more front-loaded tightening.”

Bets had grown the Federal Reserve could raise rates by a full percentage point later in July, following US data showing a 9.1% inflation print. But Fed governor Christopher Waller and St Louis Fed president James Bullard, generally considered policy hawks, said on Thursday they favoured a 75 bps move.

Markets still assign about a 45% chance to a bigger increase, but the comments eased a Wall Street sell-off and futures tip a flat to firmer opening for New York on Friday .

A pan-European equity index rose 0.7%, helped also by news Italy’s president had rejected Prime Minister Mario Draghi’s resignation. Italian shares bounced 0.9%, though they remain 5% lower on the week.

Signs from companies’ second-quarter earnings, meanwhile, are not so far encouraging; a raft of European firms posted downbeat results on Friday, following Thursday's below-forecast figures from big US banks.

Bonds and oil

The Chinese data sent iron ore prices down 9.1%, while Brent crude futures fell $1 to $94.8 a barrel

Australia’s mining index touched a nine-month low, weighed further by a warning from Rio Tinto of labour shortages.

Bonds remained in demand, with US treasury yields falling aboutnd three bps across the curve. Two-year yields held around 17 bps above the 10-year segment, the so-called curve inversion that often presages recession.

Moves were even sharper in Europe, due to Italian political turmoil but also as money markets dialled back some bets on European Central Bank policy tightening by the end of 2022.

German 10-year yields fell 11 bps to 1.071%, the lowest since May 31.

Italy’s borrowing costs slipped after jumping on Thursday about 20 bps but its yield premium over Germany was at the highest in a month.

Mizuho rates strategist Peter McCallum said the latest developments put Italy in “a no-man's land”, with no clarity on whether a new confidence vote might be scheduled.

“Until then we have uncertainty, essentially.”

The euro was flat, recovering slightly from two-decade lows of about $0.9952, having slid 1.5% this week and having hit parity against the greenback for the first time in 20 years.

The yen, meanwhile, hurtled towards ¥140/$, and last traded at ¥138.8, and the dollar index eased a touch.

US retail sales data later on Friday will show how consumers are reacting to rate rises and signs of softer growth.

Reuters