Market optimism couldn’t survive Jerome Powell’s testimony yesterday, as he said that a recession is possible, and that calling a soft landing is ‘very challenging’ under the current circumstances.
More worryingly, Powell mentioned another risk: the risk of the Federal Reserve (Fed) not managing to restore price stability and allowing inflation to get entrenched in the economy.
Major US indices closed the session slightly in the negative. The S&P 500 lost 0.13% and Nasdaq slid 0.15%. The US 10-year yield eased, however, as a sign that Powell’s testimony was already mostly factored in. The US dollar index eased.
Powell will testify today, as well, but most of the negative pricing is certainly done by now.
Finally falling?
The barrel of American crude extended losses below $103 yesterday, as Powell’s speech pointed at a possible recession. The next important test for the oil bears is the $100 level. Many investors don’t expect a downturn in oil prices below this level, pointing at a tight global supply, and resilient demand. Joe Biden’s 3-month gas tax relief could only increase demand and have no material impact on the overall market trend.
Other commodities suffer, as well, as the recession fear takes a toll on demand prospects and brings investors to liquidate their long positions in preparation for a further downside correction. iShares Diversified Commodity index fell below the 100-DMA for the first time this year, and a deeper decline is possible, given the risks of tighter monetary policies to the global economy.
In this respect, the British FTSE index, which has a high concentration of oil and mining stocks, could lose its YTD advance versus its US peers.