Stock markets stall amid recession fears

Posted January 20, 2023, 5:05 p.m

The atmosphere in global markets suddenly cooled. On the other side of the Atlantic, the release of several disappointing economic indicators and despite easing inflation, the still hawkish rhetoric from central banks has revived investor fears about the outlook for growth this year.

The increase in stock market tensions was reflected in the recovery of volatility in Europe and the United States, which fell to the lowest level in more than a year on January 13. As for stock indexes, the CAC 40 in Paris — like the S&P 500 and Wall Street’s high-tech Nasdaq — is about to record its first weekly decline since the start of the year.

“The euphoria at the beginning of the year has passed and investors are now looking at negative elements for equity markets,” says Aurel BGC’s Christian Parisot. Concerns are primarily focused on the United States, where the consequences of last year’s sudden increase in interest rates are beginning to be felt.

Recession on the horizon

Leading economic indicators, from December retail sales to industrial production and purchasing manager surveys (PMI), have been below expectations lately. All point to a sharp economic slowdown at the end of last year. “Some sectors of the economy are already in recession,” said UBS economist Brian Rose. “If household consumption stalls, this could lead to a broader slowdown,” he warns.

A succession of announcements of massive job cuts at tech giants may not reassure investors about the outlook for the coming months. In particular, the first results published for the fourth quarter on Wall Street, where about 10% of companies have already filed their accounts, proved below expectations, although they have been revised downwards in recent months. In the background, the threat of a US default, due to the lack of political agreement on raising the debt ceiling, is adding to the existing tensions.

On the contrary, the economic resilience of the Old Continent continues to surprise. “Cassandres explained to us that clouds are gathering over our country. Today the ECB tells us that France should be out of recession in 2023. This is a proof that despite the crisis, our economic foundations are strong,” said Minister of Economy Bruno Le Maire in Davos. More broadly, “inflation expectations have pushed rates lower and economic sentiment has improved with falling energy prices and the reopening of China,” said Barclays’ Emmanuel Cau.

Investors are returning to Europe

As a result, European stock markets are attracting investors again. For the first time in nearly a year, European stock markets posted positive net inflows of $200 million last week as Wall Street stocks posted a third straight week of losses, according to Bank of America.

However, the exceptional performance of European indices in recent weeks has worried more than one professional. The CAC 40, like the pan-European STOXX 600 index, is currently off to its best start to the year in history, up nearly 8% in Paris. However, about Germany, which has been the main engine of the European economy in recent years, ING’s Carsten Brzeski reminds: “It’s one thing to avoid an economic collapse, it’s another thing to organize a strong rebound in activity.”

According to professionals, European markets have actually eaten their white bread. The STOXX 600 index is expected to remain under water until the end of the year, according to an average of 19 forecasters’ responses to a Bloomberg survey. The most pessimistic predict a sharp deterioration in growth in the coming weeks and a further correction in European markets. The Old Continent’s outperformance relative to the rest of the world may not last long, warns Bank of America’s Sebastian Raedler. the end of the year.

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