Potential US recession could feed an already vicious bear market

NEW YORK, July 28 (Reuters) – The prospect of a US recession could mean more pain for battered stocks, despite a recent rebound that has taken the benchmark index to its highest level in more than a month.

Data on Thursday showed the US economy contracted for the second straight quarter – fulfilling an often-cited definition of a recession. Robust job growth accompanying the current slowdown has sparked debate on whether the economy is actually in a recession this time around, and the official arbiter of recessions – the National Bureau of Economic Research – has not yet declared one.

If the US does turn out to be in a recession, however, history shows the rough ride stock investors have endured this year may get even bumpier.

Bear markets accompanied by a recession tend to be steeper than those without an economic downturn, according to the Wells Fargo Investment Institute. Among bear markets since 1946, the average decline with a recession was 35.8% versus 27.9% on average without a recession, their data showed.

At its low point in mid-June, the S&P 500 had dropped 23.6% from its high. It has since rebounded over 10%.

Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, said the stock market may have only partially priced an economic downturn, despite its big drop this year.

“We have gone a good ways toward discounting a recession at least with respect to historical averages. The bad news is there could be as much as another 10% more down” from the recent lows, he said.

To be sure, not everyone believes the US economy is in a recession. Federal Reserve chair Jerome Powell on Wednesday said a strong employment market made it unlikely that a recession had started, while the White House is vigorously pushing back against recession chatter as it seeks to calm voters ahead of the Nov. 8 midterm elections.

Some investors have also pointed to data showing the economy remains on solid footing. Corporate profits, for example, are continuing to rise, with second-quarter S&P 500 earnings on track to have climbed 7.6% from a year ago, according to Refinitiv IBES.

Still, data from Deutsche Bank showed that since 1947, there have never been two successive quarters of negative economic growth without an accompanying recession. Thursday’s data showed gross domestic product fell at a 0.9% annualized rate last quarter.

A recession is “almost a slam dunk over the next 12 months,” wrote Jim Reid, the bank’s head of thematic research, but added that he wants “to see more evidence of employment rolling over before we would call the current US environment a recession.”

In another ominous sign, a key part of the US Treasury yield curve has been inverted for much of this month, with the yield on the 2-year note rising above the 10-year yield. Such inversions have historically preceded US recessions.

Inflation at 40-year highs and weakening growth could further fuel fears of stagflation, a toxic mix of slowing growth and high inflation that has hurt equities in the past. UBS Global Wealth Management earlier this month said the S&P 500 could fall to 3,300 in such a scenario, an 18% decline from Wednesday’s close.

Janus Henderson Investors is recommending “a defensive position within risk assets to weather the slowdown that is unfolding,” the firm’s director of research Matt Peron said in emailed comments. Peron likes shares of healthcare and software companies in the current environment, as well as real estate investment trusts.

“We continue to believe we are not out of the woods yet on the pressure the economy will feel from inflation and rate increases,” Peron said.

(Reporting by Lewis Krauskopf; editing by Ira Iosebashvili and Nick Zieminski)

Gold accelerates on gloomy US economic readings

July 28 (Reuters) – Gold rose more than 1% on Thursday as a contraction in the US economy boosted its safe-haven allure and helped to extend gains driven by a less aggressive tone from the Federal Reserve chairman.

The US economy unexpectedly contracted in the second quarter, with consumer spending growing at its slowest pace in two years and business spending declining, which could fan market fears that the economy was already in recession.

Spot gold extended gains on the data, and was last up 1.1% at USD 1,752.39 per ounce by 1:59 p.m. EDT (1759 GMT), helped along by a subsequent slide in US Treasury yields.

US gold futures settled 1.8% higher at USD 1,750.30.

After the GDP data confirmed recessionary fears, traders anticipate the Fed will be slower to introduce rate hikes, boosting the appetite for gold, Phillip Streible, chief market strategist at Blue Line Futures in Chicago, said.

Higher interest rates usually dull gold’s appeal because they increase the opportunity cost of holding the asset which bears no interest.

After the Fed’s meeting on Wednesday, when it raised overnight interest rate by three-quarters of a percentage point, Powell said another “unusually large” hike may be appropriate at its meeting in September, but the decision will be determined by incoming economic data until then.

Inflation’s not going to end with this Fed hike, and given the downtrend in gold, it’s now at an attractive level and presents an opportunity for investors looking to diversify their portfolio, said Michael Matousek, head trader at US Global Investors.

Silver rose 4.3% to USD 19.94, while platinum fell 0.2% to USD 885.00.

Palladium rose 2.6% to USD 2,083.69.

Top palladium producer Nornickel (GMKN) of Russia, kept its previous 2022 output forecast unchanged despite Western sanctions against Moscow over Ukraine.

(Reporting by Arundhati Sarkar, Arpan Varghese and Kavya Guduru in Bengaluru; Editing by Carmel Crimmins, Shailesh Kuber and Barbara Lewis)

Gold hits a three-week high as less hawkish Fed dims dollar

July 28 (Reuters) – Gold prices hit a near three-week high on Thursday after US Federal Reserve chair Jerome Powell signalled the central bank could slow the pace of rate hikes in coming months, which weighed on the dollar and Treasury yields.

Spot gold rose 0.7% to USD 1,745.20 per ounce by 0912 GMT, its highest since July 8.

US gold futures rose 1.4% to USD 1,743.70.

“The Fed has turned dovish and although signaled rates may rise, likely it will be at a slower pace so as not to spook Main Street – that has had a negative impact on both the US dollar as well as treasury yields, which have given a lift to gold,” independent analyst Ross Norman said.

The Fed raised its benchmark overnight interest rate by three-quarters of a percentage point on Wednesday in an effort to cool the most intense breakout of inflation since the 1980s.

Powell said another “unusually large” increase in interest rates may be appropriate at the September policy meeting, but the decision will be determined by the incoming economic data between now and then.

Traders have cautiously pared back expectations of further rate rises, as the second quarter GDP figures would provide clarity on the strength of the economy, Norman added.

The dollar index fell 0.2% to a more than three-week low, making greenback-denominated gold less expensive for other currency holders.

“Gold’s relief rally has further to go … gains we’re seeing now are part of a much needed retracement against its bearish trend,” City Index senior market analyst Matt Simpson said.

The next obvious target for gold bulls is USD 1,750, a break above which brings USD 1,770 into focus, Simpson added.

Meanwhile, China’s demand for gold jewellery, bars and coins is expected to fall year-on-year in the second half of 2022, a World Gold Council official said, as lockdowns cut consumer spending.

Elsewhere, spot silver jumped 1.3% to USD 19.38, platinum rose 0.7% to USD 892.36, while palladium added 2.9% to USD 2,090.42.

(Reporting by Arundhati Sarkar in Bengaluru; editing by Carmel Crimmins)

Philippine president visits quake-hit area as residents shelter outside

BANGUED, Philippines, July 28 (Reuters) – Philippines President Ferdinand Marcos promised on Thursday to help rebuild homes damaged by a powerful earthquake on the island of Luzon, as terrified residents camped out in parks and on sidewalks after hundreds of aftershocks rattled the area.

The 7.1 magnitude earthquake struck the northern Philippine island on Wednesday morning, killing at least five people and injuring more than 130.

The quake also damaged scores of houses and other buildings, including centuries-old churches in the tourist town of Vigan.

“For the affected and victims, let us make sure we are ready to support them and give them all they need,” Marcos told officials after being briefed during to a trip to inspect the damage.

The streets of Vigan, known for its old Spanish colonial architecture, have been cleared of debris, but shops, hotels and businesses remained closed.

Elma Sia, 52, who works at restaurant recalled the fear of being caught up in such a powerful earthquake.

“Everything was moving, our plates were breaking, our lights swaying. We were terrified,” she told Reuters.

“I could hear people shouting from a nearby McDonald’s restaurant, so people rushed outside to the plaza and started crying out of fear,” she said.

The quake, which hit close to the Marcos family’s political stronghold, also left a trail of destruction in Bangued town in Abra province, which was just 11 km (6.8 miles) from the epicentre.

Residents camped out with their families in shelters because they were too scared to stay at home. Seismologists have recorded nearly 800 aftershocks since the main quake.

“We were so scared,” Erlinda Bisares told CNN Philippines. “We didn’t mind our belongings, we just hurried outside. Life is more important.”

The Philippines is prone to natural disasters and is located on the seismically active Pacific “Ring of Fire”, a band of volcanoes and fault lines that arcs round the edge of the Pacific Ocean. Earthquakes are frequent and there are an average of 20 typhoons a year, some triggering deadly landslides.

Public Works Secretary Manuel Bonoan told DZBB radio his agency had started to remove debris from main roads in Abra and other districts affected by rockslides during the quake.

But efforts to assess damage to irrigation works were hampered as some roads had yet to be cleared of boulders, the National Irrigation Administration said.

Northern Luzon provinces are among the country’s biggest growers of rice and vegetables.

Ricardo Jalad, administrator of the Office of the Civil Defense, told radio station DZRH some parts of Abra were still without power or water and experiencing communication outages.

The budget ministry said authorities were ready to release funds for disaster relief.

(Reporting by Karen Lema and Neil Jerome Morales in Manila, and Adrian Portugal in Vigan; Editing by Ed Davies, Robert Birsel)

Dollar nurses losses vs yen as traders dump rate differential trades

LONDON, July 28 (Reuters) – The U.S. dollar slumped to a three-week low versus the Japanese yen and struggled against its other major rivals on Thursday as markets ramped up bets on a softening in the pace of rate hikes.

While Federal Reserve Chair Jerome Powell delivered a widely expected 75 bps hike in interest rates, it altered its statement to cite some softening in recent data and dropped its commitment to guide markets on the future trajectory of interest rates.

The dollar’s weakness was the most prominent against the yen with the greenback slumping nearly 1% versus the Japanese unit to hit its lowest since early July at 135.10 yen. The yen was the primary recipient of the widening interest rate differential trade between the United States and its global peers.

“Speculation is now building that the dollar may have peaked if the pace of tightening slows in September after consecutive 75bp moves in June and July,” said Kenneth Broux, an FX strategist at Societe Generale in London.

“It is still too soon to draw any firm conclusions and the next move will depend on incoming data.”

Markets have already ramped up bets of a softening in future U.S. interest rate hikes with futures now assigning a 65% probability of a 50 bps hike in September from 50% on Wednesday, according to CME. Bets of a 75 bps hike have been pared back to 35% from 41%.

The dollar index, which measures the greenback against six counterparts including the yen, edged 0.05% lower to 106.31 after dropping 0.59% overnight and just shy of 106.1 which would be the lowest since July 5.

The euro, which is the most heavily weighted currency in the index, was little changed at $1.02045, following a 0.82% jump overnight. Sterling was 0.05% higher at $1.21640, after rallying 1.06% on Wednesday.

Cryptocurrency bitcoin rose 1.33% to $23,081.18, after a more than 8% surge the previous session.

A gauge of currency market volatility settled at its highest level since July 8 above 10%.

(Reporting by Saikat Chatterjee)

Oil extends gains as risk appetite improves, U.S. inventories fall

SINGAPORE, July 28 (Reuters) – Oil rose more than USD 1 a barrel on Thursday, extending gains from the previous session, buoyed by improved risk appetite among investors as lower crude inventories and a rebound in gasoline demand in the United States supported prices.

Brent crude futures for September rose USD 1.13, or 1.1%, to USD 107.75 a barrel by 0619 GMT, after gaining USD 2.22 on Wednesday.

US West Texas Intermediate crude (WTI) was at USD 98.53 a barrel, up USD 1.27, or 1.3%, after rising USD 2.28 in the previous session.

“Risk sentiment has recovered from recession fears due to the ongoing US earnings optimism and less aggressive Fed rhetoric on rate hikes, which supported a rally in the crude market,” CMC Markets analyst Tina Teng said, adding that a weakened US dollar has also lifted commodities prices.

The US Federal Reserve raised its benchmark overnight interest rate by three-quarters of a percentage point, in line with expectations, to cool inflation, while the dollar fell on hopes for a slower hiking path.

A weaker dollar makes oil, priced in dollars, cheaper for buyers in other countries to purchase.

On supplies, US crude oil stockpiles fell by 4.5 million barrels last week, against expectations of a 1 million-barrel drop, while US gasoline demand rebounded by 8.5% week on week, data from the Energy Information Administration showed.

“The US consolidated its position as the world’s largest petroleum exporter,” Citi analysts said in a note, as combined gross exports of crude oil and refined products stood at a record 10.9 million barrels a day.

US crude exports reached a record 4.5 million bpd as WTI traded at a steep discount to Brent, making purchases of US crude grades more attractive to foreign buyers.

Prices also found support as the Group of Seven richest economies aims to have a price-capping mechanism on Russian oil exports in place by Dec. 5, a senior G7 official said on Wednesday.

US crude oil production growth could also be limited by the availability of fracking equipment and crews, as well as capital constraints, executives said this week.

Russia has cut gas supply via Nord Stream 1, its main gas link to Europe, to just 20% of capacity. That could lead to switching to crude from gas and prop up oil prices in the short term, analysts said.

“We increase our total estimates for additional oil demand from gas to oil switching by 700,000 bpd from October 2022 through March 2023,” JP Morgan analysts said in a note.

However, this is offset by normalizing Libyan supply, leading to a largely balanced global oil market in the fourth quarter, followed by a 1 million bpd stockbuild in the first quarter of 2023, they added.

“We keep our price forecast unchanged and see global oil price in the low-USD 100s in 2H22 and high USD 90s in 2023,” the bank said.

(Reporting by Florence Tan in Singapore and Arathy Somasekhar in Houston; Editing by Stephen Coates and Clarence Fernandez)

Nasdaq has biggest one-day jump since 2020 after Fed rate hike

NEW YORK, July 27 (Reuters) – The Nasdaq jumped more than 4% on Wednesday in its biggest daily percentage gain since April 2020 as the Federal Reserve raised interest rates as expected and comments by Fed Chairman Jerome Powell eased some investor worries about the pace of rate hikes.

Quarterly reports from Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL) and others added to the day’s upbeat tone.

The S&P 500 growth index jumped 3.9% and also registered its biggest one-day percentage gain since April 2020. Tech and growth stocks, whose valuations rely more heavily on future cash flows, have been among the hardest hit this year.

The S&P 500 closed at its highest level since June 8, with the technology sector giving the index its biggest boost.

The Fed, in a statement following its two-day meeting, raised the benchmark overnight interest rate by three-quarters of a percentage point. The move came on top of a 75 basis points hike last month and smaller moves in May and March, in an effort by the Fed to cool inflation.

Powell’s comments in a news conference after the statement gave some investors hope for a slower pace of rate hikes.

Equity investors have been worried that aggressive hikes by the Fed could tip the economy into recession.

“He did not commit to any specific rate hike in the September meeting,” said Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis.

Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, said it was “a calming statement, coming on the heels of a day where you saw some earnings and revenues that were better than expectations, albeit expectations that were very tempered.”

The Dow Jones Industrial Average .DJI rose 436.05 points, or 1.37%, to 32,197.59, the S&P 500 gained 102.56 points, or 2.62%, to 4,023.61 and the Nasdaq Composite added 469.85 points, or 4.06%, to 12,032.42.

Wednesday’s hike was widely anticipated by investors.

Microsoft rose 6.7% after it forecast double-digit growth in revenue this fiscal year on demand for cloud computing services.

Alphabet jumped 7.7%, a day after it reported better-than-expected sales of Google search ads, easing worries about a slowing ad market.

T-Mobile US Inc. (TMUS) added 5.2% after it raised its subscriber growth forecast for the second time this year and exceeded quarterly profit expectations.

Volume on US exchanges was 10.56 billion shares, compared with the 10.88 billion average for the full session over the last 20 trading days.

Advancing issues outnumbered declining ones on the NYSE by a 5.27-to-1 ratio; on Nasdaq, a 3.15-to-1 ratio favored advancers.

The S&P 500 posted one new 52-week high and 30 new lows; the Nasdaq Composite recorded 50 new highs and 107 new lows.

(Additional reporting by Shreyashi Sanyal, Sruthi Shankar and Aniruddha Ghosh in Bengaluru and Sinead Carew in New York; Editing by Anil D’Silva, Jonathan Oatis and Aurora Ellis)

Dollar falls after Fed hike, Powell comments

NEW YORK, July 27 (Reuters) – The dollar fell on Wednesday against a basket of major currencies after the US Federal Reserve raised interest rates by 75 basis points, as was widely anticipated, and comments from Fed Chair Jerome Powell spurred hopes for a slower hiking path.

The central bank raised rates by three-quarters of a percentage point for the second straight meeting as it attempts to rein in inflation, but noted that while the labor market remains strong, other economic indicators have softened.

“You certainly can view the policy statement as hawkish but it is pretty consistent with what they have been saying for the last couple of meetings – they are going to continue to hike – estimates had them going into restrictive territory, they are at neutral now and they continue to think they are going to need to go into restrictive territory,” said Marvin Loh, senior global market strategist at State Street in Boston.

“Theoretically, the dollar should be stronger in an environment where it is hawkish but it was as expected and we have had a lot of movement in the dollar so far this month.”

The greenback initially moved higher after the statement but quickly reversed course, and weakened further along with Treasury yields while US stocks rallied as comments from Fed Chair Jerome Powell after the policy statement were seen as dovish.

“Hopes for a slower pace of rate hikes pushed expectations for additional rate hikes lower, bond yields lower, credit spreads tighter and stock prices higher,” said George Bory, chief investment strategist for fixed income with Allspring Global Investments.

“Despite the initial pop in risk assets, much still hinges on inflation and the Fed’s ability to return ‘inflation to its 2% objective.'”

Expectations for a 50 basis point hike at the Fed’s September meeting grew to 60.9%, according to CME’s Fedwatch Tool, up from 50.7% on Tuesday, while projections for a 75 basis point hike fell to 35.2% from 41.2%.

The dollar index fell 0.756% to 106.310, with the euro EUR= up 0.97% to USD 1.0212. The greenback was on pace for its biggest one-day percentage drop since July 19.

Bets on oversized rate hikes helped push the dollar index to a two-decade high earlier this month at 109.29, but the greenback has eased lately as economic data has hinted at a possible recession.

But on Wednesday, data showed the US trade deficit narrowed sharply in June as exports jumped, while orders for non-defense capital goods excluding aircraft, seen as a proxy for business spending plans, rose 0.5% last month, potentially soothing some concerns about the economy.

The euro recouped nearly all of prior session’s decline, which was the biggest one-day percentage drop for the currency in two weeks, but fears of a European recession remain high as Russia further slowed gas supplies to Europe through the Nord Stream 1 pipeline.

The gas crisis, along with political woes in Italy, will push the region into a mild recession by early next year and limit the European Central Bank’s path of interest rate hikes, analysts at JPMorgan said.

The Japanese yen strengthened 0.26% versus the greenback to 136.58 per dollar, while Sterling was last trading at USD 1.2175, up 1.25% on the day.

In cryptocurrencies, bitcoin last rose 8.65% to USD 22,792.02.

(Reporting by Chuck Mikolajczak; Editing by Kirsten Donovan and Nick Zieminski)

Gold bounces over 1% as dollar retreats post Fed verdict

July 27 (Reuters) – Gold jumped more than 1% as the dollar and Treasury yields retreated after the US Federal Reserve hiked interest rates by 75 basis points as expected.

Spot gold rose over 1% to USD 1,735.49 per ounce by 3:36 p.m. EDT (1936 GMT). US gold futures settled 0.1% higher at USD 1,719.1.

The Fed raised rates by three-quarters of a percentage point in an effort to cool the most intense breakout of inflation since the 1980s.

Fed Chair Jerome Powell said the lack of clear visibility into the future trajectory of the economy means the central bank can provide reliable guidance about where its policy is headed only on a “meeting by meeting” basis.

“If the market now believes interest rates might not move as high (and) as fast, that is relatively a positive environment for the gold market moving forward and the reason why we’re seeing a positive move after the Fed meet,” said David Meger, director of metals trading at High Ridge Futures.

The dollar’s retreat bolstered gold’s appeal among overseas buyers, while benchmark US Treasury yields also slipped.

“However, gold price risks look to be skewed to the downside as the market continues to take its cue from the USD amid a seasonally slow period for demand as the market prices in rate hike expectations for the September FOMC meeting,” Standard Chartered analyst Suki Cooper said.

Rate hikes to fight soaring inflation tend to raise the opportunity cost of holding bullion, which yields no interest.

The Fed’s aggressive rate hikes and the dollar’s recent rally have overshadowed bullion’s appeal as a safe-haven despite recession risks of late.

Reflecting sentiment, holdings of the SPDR Gold Trust GLD exchange-traded fund touched their lowest since January, to about 32,321,124 ounces.

Other metals latched on to gold’s run. Spot silver rose 2.6% to USD 19.09 per ounce, platinum added 1.4% to USD 886.09, while palladium gained 0.6% to USD 2,023.55.

(Reporting by Ashitha Shivaprasad and Kavya Guduru in Bengaluru; Editing by Will Dunham, Aditya Soni and Krishna Chandra Eluri)

Microsoft, Alphabet earnings lift futures ahead of Fed decision

July 27 (Reuters) – US stock index futures rose on Wednesday as better-than-feared quarterly reports from technology giants Microsoft and Alphabet calmed investors ahead of a key US interest rate decision later in the day.

The results lifted sentiment after markets closed sharply lower on Tuesday on a profit warning from top US retailer Walmart (WMT) and weak consumer confidence data.

Microsoft Corp. (MSFT) rose 3.8% in premarket trading on Wednesday after it forecast revenue would grow by double digits this fiscal year, driven by demand for cloud computing services.

Alphabet Inc. (GOOGL) added 3.5% as better-than-expected sales at Google search ads brought relief after social media firm Snap Inc.’s (SNAP) warning last week raised fears of a sharp ad market slowdown.

“A positive reaction from the latest quarterly numbers has been incredibly hard-won given the negative market sentiment surrounding broader tech,” said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown.

Shares of other high-growth stocks including Amazon.com Inc. (AMZN), Meta Platforms Inc. (META) and Apple Inc. (AAPL) also got a boost ahead of their earnings this week.

Megacap growth stocks have been hammered this year as the Federal Reserve raised interest rates aggressively to tame decades-high inflation. Future cash flows on which valuation of these companies rests are discounted heavily when rates rise.

Investors widely expect the US central bank to increase interest rates by another 75 basis points later on Wednesday, with focus likely to shift to how deeply signs of an economic slowdown have registered with its policymakers.

Money market traders were even placing about a one-in-four chance the Fed would surprise markets with a larger 1-percentage-point increase, as per CME Group’s Fedwatch tool.

The decision is due at 2:00 pm ET (1800 GMT) and Fed Chair Jerome Powell’s news conference half an hour later should elaborate on how the central bank views the recent economic data and at least hint at its next steps.

“Earnings may play second fiddle to the FOMC meeting tonight if the Fed surprises with more hawkishness than the market is pricing,” Peter Garnry, head of equity strategy at Saxo Bank said in a note.

At 06:40 a.m. ET, Dow e-minis were up 136 points, or 0.43%, S&P 500 e-minis were up 34.75 points, or 0.89%, and Nasdaq 100 e-minis were up 175.25 points, or 1.45%.

PayPal Holdings Inc. (PYPL) jumped 5.7% after a report said activist investor Elliott Investment Management is building a stake in the fintech giant to push it to ramp up its cost-reduction efforts.

(Reporting by Sruthi Shankar and Aniruddha Ghosh in Bengaluru; Editing by Sriraj Kalluvila)

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