- Sentiment steadies
- Recession fears growing - UK consumer spending slides
- Commodity prices easing
European stocks rose in early trade on Friday after a solid session in Asia which followed an up day for Wall Street. Stocks in London and Paris rallied as much as 1 per cent, whilst Frankfurt was about half of one percent higher for the session. The S&P 500 rallied 1 per cent and is headed for a weekly gain of 3.3 per cent, with the Dow Jones up 2.6 per cent and the Nasdaq Composite outperforming with a rise of 4 per cent. This gain for tech seems to be a yield play. European stock markets are headed for much smaller weekly gains but remain in the green as of this morning. Increasing worries Russian will cut off gas supplies as it flexes its muscles with flows down a lot lately. Head of German utility RWE said European solidarity will come under “significant stress” if the bloc cannot sort out how to prioritise gas supplies if Russia cuts them off. US nat gas yesterday extended losses apparently on cooler temperatures forecast in North America.
Recession fears: commodities down, yields down. Contrary trade saw US tech bid on lower yields, whilst energy and basic materials were down again. 10yr Treasury close to breaching 3 per cent with 2s 20bps below indicates the market is worried about slower growth over the longer term but confident the Fed will hike to neutral – around 3 per cent or so - this year, and then possibly start cutting in 2023. Rates have moved sharply to wipe out all the extra yield since the hot CPI report and the Fed’s 75bps hike. Recession fears mean the market has dialled back its expectations for just how the far the Fed will go, which is helping growth stocks to mount a defence. PMIs are declining and lower commodity prices has the market more focused on slowdown than searing inflation, which seems on-balance net positive for stocks. But this masks lots and we don’t know how far earnings estimates need to come down… arguably the multiple compression we have seen points to the market already pricing in lower earnings growth, not just a higher risk-free rate. Frankly the give-back in yields looks complacent but there might be more of it before bonds are sold again.