The global financial
markets are in a state of turmoil, driven by multiple factors pointing towards
an impending recession. Key indicators such as a weak U.S. labor market report,
yield curve inversion, and significant drops in major indices are painting a
grim picture. The S&P 500 broad market index futures have dropped by 1.7%
to 5233 points, a significant decline from the previous session's low of 5169
points. The primary driver for this drop is a weak U.S. labor market report for
July, which saw the unemployment rate increase to 4.3% from 4.1% in June. This
rise in unemployment has triggered the Sahm Rule recession indicator, which
signals a recession when the three-month moving average of the national
unemployment rate rises by 0.50 percentage points or more relative to its low
during the previous 12 months. The recent jump of unemployment in the United States made this rule
to materialize. So, investors are seeing recession right ahead.
Adding to the recession fears is the yield
curve inversion, a reliable recession signal. The 2-year Treasury yields are at
3.79%, slightly above the 10-year Treasury yields at 3.74%. This inversion has
been in place for several years, the longest period on record, indicating
prolonged economic uncertainty. The normalization of this yield curve could
happen soon, considering the recent elevated market volatility. The Nikkei 225
index in Japan has plunged by 12.5% to 30,705 points, entering bearish
territory with a total decline of over 27% from its July highs. The main cause
of this decline is the Bank of Japan's monetary tightening, which has
strengthened the Yen by 12.2%, adversely affecting exports, a crucial component
of Japan's economic growth.
Commodities and cryptocurrencies are also
showing signs of distress. Brent crude oil prices have fallen below critical
levels and are heading toward $70.00 per barrel, with potential for further
decline. Bitcoin has crashed, adding to the overall market anxiety. Gold prices
have reached mid-term targets of $2000-2100 per troy ounce and are hovering
around the extreme levels of $2400-2500. The market sentiment is decidedly
risk-off, driven by fears of a global recession. High-profile investors,
including Warren Buffet’s Berkshire Hathaway, have significantly reduced their
stakes in major companies like Apple. The SPDR S&P 500 ETF Trust reported
net outflows of $7.7 billion last week, the largest since mid-June.
Geopolitical tensions, particularly the risk
of a war between Israel and Iran, are exacerbating market fears. Analysts
believe Iran could launch a significant strike on Israel, potentially
triggering a regional war in the Middle East, which would likely send oil
prices skyrocketing and further disrupt global markets.
The are no
important macroeconomic data due to be released this week. Services PMIs
releases in China, the Eurozone, in the U.K., and in the U.S. could only
contribute to the grim picture in the market. The interesting evolving story is
that the Federal Reserve (Fed) could make an emergency cut of its interest
rates before the meeting in September. This move may increase sell-offs in the
stock market, as investors may consider it as a bold signal of rapidly deteriorating
economic situation. The best strategy for the Fed is to move step by step until
the bottom in the stock market would be established.
Technically, the
S&P 500 index's immediate resistance is at 5280-5300 points, with support
at 5180-5200 points. A breach of this support could lead to further declines to
5080-5100 points. The primary downside targets are at 5200-5300 points, with
extreme downside targets at 4850-4950 points by the end of September. A correction signal has been noted at 5511 points.
Oil prices have smashed
the support at $80.00-82.00 per barrel for Brent crude and is seeking the next
support, which is at $70.00-72.00 per barrel. A recovery from this level is highly
likely.
Gold prices, have
reached mid-term targets of $2000-2100 per troy ounce and extreme levels of
$2400-2500. Prices may continue to hoover within the $2400-2500 range in
August. The nearest resistance is at $2490-2510 per ounce, while the support is
at $2390-2410.
The EURUSD rose sharply
from the support at 1.08100-1.08400 after the release of U.S. labour market
report for July. This pair is heading to primary target at 1.10000-1.11000.