All Roads Lead To a Great Recession
Despite encouraging headlines about China loosening its covid policies, US stocks fell sharply from earlier highs after bleak consumer confidence data poured cold water on the month-end relief rally. That is in the range it was printing in during the 2015/16 downturn.
It’s a difficult market to navigate these days: yesterday, bad data equaled good news; today, poor data signals that all roads lead to recession.
With consumer confidence at multi-year lows, dragged down by high gasoline and other inflationary price pressures, walking in to see Brent Crude testing $114 is providing more gnarly inflationary proof.
The earnings downgrade dam is expected to burst, but market reaction will determine whether the cuts are sufficient.
Short sellers were waiting for proof that the US consumer was in trouble. The gloomy sentiment data suggests that weaker consumer demand will exacerbate an earnings recession, potentially leading to new lows. So, whether the recent US and Eurozone equity market upswing represents a cycle low or a bear market rally is primarily determined by the economy’s downside earnings risks, and the latest data should provide a very sobering thought.
With the macro backdrop leaning inflationary, owing to rising oil prices, the headwinds for equity markets, namely central bank tightening, will persist. This whirligig action across markets is being supported by energy price movements. As oil prices fell, inflation expectations fell, and Fed tightening forecasts fell, allowing equities to rebound early this week. Now that oil is creeping back up, it is easy to see how things could quickly reverse.
There has been a lot to digest recently, and it does not appear that headlines will stop anytime soon, with Iran nuclear talks reportedly resuming, the G7 meeting, and cautious comments regarding UAE and Saudi spare capacity. So, when will the EU/US supply talks aggressively pivot to Iran or Venezuela?
Oil prices are surging again, aided by reports that excess spare capacity in Saudi Arabia and the United Arab Emirates is not as large as previously thought; meanwhile, production disruptions in Libya and Ecuador due to political unrest could further threaten global oil supply.
Furthermore, the Chinese government has relaxed some quarantine rules, which could result in more planes filling the tracking radars across ASEAN flight paths. Indeed, this is the first time China has done so since the outbreak began, which could lead to a broader relaxation of restrictions if the covid curve remains stable.
The G-7’s overarching goal is to keep Russia from profiting from high energy prices. Domestic political pressures must also be addressed; all countries are experiencing the same backlash from their electorates regarding energy costs. However, discussing price caps and comprehending how they could be implemented are two entirely different things. Although it is not difficult to limit Russian oil supply, putting a price cap in place is a different matter, especially given that limiting or ending Russian supply drives up oil prices.