The ASX has taken a dive today, but coal miners rallied on the back of Russia’s Nord Stream 1 closure.
The S&P/ASX200 dropped 75.5 points or 1.07% to 6,971.4, crossing below its 20-day moving average. Over the last five days, the index has lost 1.89% and 6.93% over the last 52 weeks.
When it hit minus 0.5% at lunchtime today, it marked the worst two-day fall in two months.
The worst performing stocks were Endeavour Group Ltd, down 11.25%, and EML Payments Ltd, down 11.56%.
Endeavour was hit by cautious outlook statements, although it should be noted that the Group did hit a record high of $8.40 last week.
The group expects its hotel operations to continue to grow post-pandemic and retail sales to normalise, but high inflation is set to impact wages, pricing and supply chain costs.
UBS analyst Shaun Cousins said FY22 earnings before interest and taxes and net profit after tax were both just 1% below consensus estimates, with hotels above and retail below.
"This mix shift is also reflected in trading to start 1H23, as the reopening tailwinds are coming through more than expected and the return of liquor at home due to rising cost of living has not yet occurred," Cousins said.
What’s making news today
To be or not to be, that is the recession
The R word is back on the tips of investors’ tongues.
With the ASX down 0.5% by midday and Wall St tanking overnight, the relief rally looks to have come to a grinding halt and fears of a global recession are growing.
Bond yields are also a strong indicator of recessionary headwinds: the US 10-year bond yield climbed almost 6 basis points to 3.03%, its first close above 3% since July 20 and the two-year yield rose 8.4 basis points to 3.32%, noting the latter is interest rate-sensitive.
“Hawkish signals from Fed officials recently, as well as hawkish words from the European Central Bank about hiking even with growing recession risks in Germany has led to a reassessment of the market’s view on rates,” said National Australia Bank director of economics, markets Tapas Strickland.
Yield trends have led to the markets factoring in a 66% chance of the US central bank hiking the cash rate by another 0.75% in September.
The situation is direr in the UK, where rates are expected to skyrocket to 6 or 7% to rein in inflation, which is predicted to go to 18%, well above the Bank of England’s forecast of 13%.
Exacerbating the issue is European gas prices which surged 14% overnight after Gazprom said it was halting gas supply from its Nord Stream 1 pipeline for three days. Gazprom is a key European supplier and the shutdown is expected to hit hard.
ANZ believes the markets are betting on a reduced supply once the pipeline is operational again. The current capacity is 20%, and it is likely to be less when the three days are up.
Strickland said of the looming crisis: “Europe’s dire energy situation and headlines of UK inflation hitting 18.6% suggests the peak of inflation is not here yet, and the risk remains that inflation is sticky higher for longer without further aggressive central bank action.”
While there is no recession yet and no concrete evidence that we will fall into one, Bloomberg Economics says there’s close to a three-in-four probability there will be a recession by the start of 2024.
Deutsche Bank AG (NYSE:DB) has forecast a recession to begin in mid-2023, with Wells Fargo & Co. making a similar prediction. Nomura Holdings Inc. predicts a recession at the end of 2022.
“I can’t think of a time when the economy has been like this. In this century or last,” Bill Adams, chief economist at Comerica (NYSE:CMA) Bank, told Fortune. “The aftereffects of the pandemic, the stimulus, and now the Russia-Ukraine war—it’s just been a mix of crosscurrents.”
Mabrouk Chetouane, head of global market strategy with Natixis Investment Managers Solutions in a report this month said: "The word recession is casting a long shadow over the markets, but in some ways the only way out of this inflationary environment is for central banks to trigger this recession."
On the other side of the equation, chief investment officer for Northern Trust Wealth Management said: "Recession is not our base case. We continue to expect the economy to slow meaningfully but avoid a 2022 recession."
While Boston Consulting Group associate director Hady Farag said we could be in a recession, but: “No two recessions are alike. I don't think people are deeply concerned about a major recession or massive stagnation."
Treasury Secretary Janet Yellen said she would be “amazed” if the National Bureau of Economic Research (NBER), which is in charge of officially declaring the beginning and end of economic downturns, declared a recession.
On home soil, economist Saul Eslake said, “I don’t think a recession – which, incidentally, I define as a period in which unemployment rises by 1½ percentage points or more, in 12 months or less, and then until it starts coming down, rather than “two consecutive quarters of negative real GDP growth” – is likely. What I mean by that is that the probability of a recession, thus defined, is less than 50%. But it’s not zero either. I’d put it at about 20% to 25%.”
Commsec chief economist Craig James said: “So, after the strong post-pandemic economic recovery, is there a greater chance of a recession emerging? Yes, especially with interest rates being quickly lifted to more ‘normal’ levels in an attempt to get inflation back under control.
“But do I think that a recession can be avoided? Yes, most definitely. Central banks have more expertise in dealing with economic shocks and have developed a broader skill set. They are also more likely to work together to deal with the issues of the moment.”
Senior economist at AMP Capital Diana Mousina said: “While the risk of a recession has gone up we think that Australia will avoid a recession in 2022-2023 but the risks are higher in the US where interest rate hikes are likely to be more aggressive to get inflation down.”
You can read their full comments here.
There are so many mixed signals that a recession is upon us that no one can truly make an accurate prediction.
Time will tell.
The Five at Five
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One for good luck
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