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August 10, 2022
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Markets in panic mode fearing recession

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

 While poking a hole in our wallets, persistent inflation is spooking investors too, fearing a more violent rate hike by the Fed tomorrow and the beginning of a recession. The result was S&P 500 reaching a more than 20% correction this year pushing it into what the investors consider bear market territory.

=From 1946 till now statistics show that on average bear markets in the US last about one year. The average market drop was around 29% but we have seen drops of over 48% in 1973 and 2000, with the largest drop of 56.8% in 2007. The most recent drop was of 33.9% in 2020 and lasted only one month. The US market saw its S&P 500 peak this year on January 3rd at 4796.56, and fell yesterday to 3749.63, which is a 21.8% drop from its maximum.

In the context of the current global situation, economic data in Romania is also showing some worrisome figures. Industrial production decreased almost 7% compared with last year, with a 3.1% decrease only in the first four months of this year. Inflation is pushing higher too. The latest data for May shows a yearly inflation figure rising to 14.5% increasing from 13.76% one month before. The largest price hikes in May were brought by potatoes with almost 19% increase from previous month and cooking oil with a 6% increase. Food prices rose 1.73% and non food prices rose 1% compared with April. While being an inflation driver in the past months – the energy prices have risen more than 41% year on year – in May they showed only a marginal increase of  0.18%, with electricity showing a slight decrease of 0.3%. Fuel prices including gasoline and diesel continued to rise, up 3% from April.

The international oil prices are still on the rise, being able to ignore the lower demand outlook, with tight supply after Russian sanctions following the Ukraine conflict. In addition, Libyan production fell by half due to armed groups forcing the closure of ports and facilities in order to change the regime and there are fears that current capacities are not enough to satisfy demand.  Brent prices are hovering above 122 USD per barrel but recent forecasts are seeing it to 140 USD and even 175 USD in the near future. However, the futures are quoting prices in September at around 119 USD, below current values with prices dropping below 100 USD in December 2023, putting more pressure on current production and prices.

The US May annual inflation was 8.6% — the largest annual increase since December 1981. The main drivers for the inflation were heating fuels, gas and food. Another worry comes from the tight labor market and increasing salaries that can add to the inflation spiral. According to a study, average budgeted salary increases in 2022 reached 5.2 percent, up from 4.5 percent last year in the U.S. The tight labor market is likely to continue, 40%  of U.S. employers say they will hire aggressively in 2022, while 46% plan to hire at a normal pace with only 13 percent being very selective and 1 percent freezing hiring.

US 10-year bond yields have surged to over 3.2%, on the outlook for higher inflation and interest rates. This cuts the future value of corporate cash flows, especially impacting the tech sector. Waiting for the Fed decision, economists at JPMorgan Chase & Co, Goldman Sachs Group Inc. and Nomura Holdings Inc. on Monday joined their peers at Barclays and Jefferies, estimating that the central bank would announce a 75-basis-point hike on Wednesday, which would be the biggest increase since 1994.

While all the above point to a rise in recession risks, this is not inevitable. Global economic growth has been resilient, consumers have significant savings, and companies have seen strong profits growth. But these buffers are not insurmountable, and the longer inflation stays high the greater the risk of a recession.

 

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Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

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