Economic slowdown rather than recession fears buoys markets

Market Reports

by Tim McGowen

Good morning. I’m Tim McGowen for Finance News. This is your market outlook.

US equities were sharply higher in very quiet Friday trading, finishing near session highs and capping off big weekly gains.

At the closing bell, the Dow Jones gained 2.7 per cent to 31,501, the S&P 500 jumped 3.1 per cent to 3,912 and the Nasdaq climbed 3.3 per cent higher to 11,608.

The S&P 500 is up nearly 6.5 per cent for the week, while the Nasdaq gained 7.5 per cent, the Dow is 5.45 per cent higher.

On the economic front, Jay Powell, the Fed chair, says a recession is “certainly a possibility.” Powell said the Fed might be able to slow inflation without tipping America into a painful downturn. But successfully executing a so-called soft landing “has been made significantly more challenging by the events of the past few months,” he said, citing supply disruptions that have pushed prices higher.

Meanwhile a Ban of America note highlighted that there’s a one-third chance of a recession being priced into the stock market so far. Analysts pointed out that the current bear market is the the 27th since 1929, and historically they have resulted in a 35 per cent average decline. That implies the S&P 500 would bottom at 3,100 v 3911 currently - largely in line with BofA's worst-case scenario of roughly 3,000 using its equity risk premium framework. That said Investors say the weakening economic data have sparked hopes that a slowdown could calm inflation, and towards the end of the week

There’s been a really powerful shift from a very aggressive rates and inflation narrative to the idea of an economic slowdown,

Traders were now “clinging to this idea” of worsening economic conditions “reducing the pressure on central banks to raise interest rates

In defence of the market – after heavy weeks of selling - JP Morgan believes investors now hold as much cash as they did in March 2020, when the rapidly-spreading coronavirus pandemic triggered a stock market sell-off.

And that if we do have a recession, it's likely it'll be on the shallow end, as private sector balance sheets are in better shape than at the end of previous business cycles.

All 11 sectors of the S&P 500 ended Friday in positive territory, with materials, financials, tech and consumer-discretionary stocks amoungst the strongest performers.

Banks stocks got a boost from the Fed’s annual stress tests, released late Thursday, which gave the country’s biggest lenders a clean bill of health

The central bank said the 34 biggest US banks it oversees, have more than enough capital to weather a severe recession with unemployment at 10 per cent, growth falling and share prices falling 55 per cent.

Strongest performing thematics included holiday cruising, search engine stocks, AI, airlines and social media stocks.

Oil prices climbed, with futures on benchmark Brent crude rising 2.8 per cent to settle at $113.12 a barrel, although oil prices are down nearly 8 per cent this month.

Brent crude remains above $100 per barrel and is unlikely to see much downward pressure from a surge in new supply. Analysts have argued that estimated capital expenditures among US oil producers as share of operating cash flow has plummeted to a record low of 30 per cent, down from the 2011-2016 range of 80%-100%.

Copper futures unchanged to cap off big weekly decline.

Iron ore futures point to a 2.3 per cent gain.

The recent decline in commodity prices is an encouraging signal, analysts have argued – as its exactly what the Fed would want to see since commodities are part of the reason why inflation has been so high

US Dollar was weaker against euro and sterling but a bit firmer on yen cross.
Gold finished fractionally higher
Bitcoin futures up 1.5 per cent.
The Aussie dollar remained just over 69 US cents as the greenback eased a touch on Friday.

ASX Futures are up 103 points or 1.59 per cent to 6573 at 7am AEST.

Figures around the globe

Across the Atlantic, European markets closed higher. Paris jumped 3.2 per cent, Frankfurt rose 1.6 per cent, while London’s FTSE gained 2.7 per cent.

Asian markets closed higher, Tokyo’s Nikkei gained 1.2 per cent, Hong Kong’s Hang Seng jumped 2.1 per cent while China’s Shanghai Composite added 0.9 per cent.

On Friday, the Australian sharemarket gained 0.8 per cent to 6579.

Ex-dividend

There are two companies set to trade without the right to its dividend.

Fat Prophets Global Property Fund (ASX:FPP) is paying 3 cents unfranked
NZME (ASX:NZM) is paying 4.5208 cents 62.22 per cent franked 

Commodities

Iron ore futures point to a 2.3 per cent gain.

Gold has added $0.50 or 0.03 per cent to US$1830 an ounce. Silver was up $0.07 or 0.3 per cent to US$21.16 an ounce.

Oil has jumped $3.35 or 3.2 per cent to US$107.62 a barrel.

Currencies

One Australian Dollar at 7:15 AM has strengthened since Friday, buying 69.44 US cents (Fri: 68.96 US cents), 56.62 Pence Sterling, 93.87 Yen and 65.83 Euro cents.

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