A Coming Global Recession?

As the S&P 500 falls into bear territory and the Fed left open the possibility of another 75bps hike at the next meeting, what are the chances that GDP growth will go negative?

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Is it a foregone conclusion?

Yesterday, global stock markets took a leg lower following a surprise move by the Swiss National Bank to raise rates by 50bps. The monetary policy of a country the size of Switzerland, naturally wouldn't impact the whole world. So, it was more that the SNB, which hadn't raised rates in 15 years, is taking drastic action that is worrying markets. Furthermore, it also warned that inflation was going beyond sectors impacted by the war in Ukraine and the pandemic.

It's the latest event in a sudden shift in sentiment after the surprise CPI figures from the US a week ago. Even before the Fed hiked by 75bps in the most aggressive move since the early '80s, as many as 70% of economists in an FT survey said they expect a recession by next year. Then yesterday the BOE also said it expected to see negative growth in the second quarter, and inflation not abating until after the third quarter (which heavily implies an expectation of a recession).


What now?

If everyone expects a recession and behaves accordingly, there will be a recession. At the start of the year, the shift was from speculative stocks to value stocks. Now it's to anything that will hold value. Even a month ago, traders were warning of constricted liquidity, which would only be expected to get worse as central banks draw more money out of the markets.

So far this year, the markets have been subject to black swans, but that doesn't mean a white swan can come along at any moment. What remains pending is the readjustment following the reopening in China. Freight rates between China and Europe have yet to recover from the recent covid shutdown in China, suggesting the rush to fill the backlog of orders hasn't yet manifested. The question now is whether a sudden rebound in supply chain problems is the next bit of negative news for the markets.

SP500 falls out of channel

The SP500 lost the lower barrier of its descending base channel this week following a gap lower. When channels lose support or resistance-trendlines, the directional trend often accelerates. Furthermore, the index slid below important Fibonacci support (the 38.2% of the 2175-4815 leg) which has flipped to resistance near 3800. Below there, the 50% Fibonacci at 3500 is the next level requiring attention. And then, the golden pocket (61.8%) is near 3200.

On the other hand, bulls might attempt to fill the gap at 3900. Whether the index reverses or shifts back down again might depend on what happens at 4k. It’s a major level, but it’s currently in the base channel.

Source: Spreadex trading platform

Key takeaways

Central banks continue to raise interest rates at an unprecedented speed after a long period of excessively low rates, causing worldwide stock markets to tumble as inflation slips into sectors beyond the war and the pandemic. As the readjustment from China’s reopening is looking dire, economists expect a recession, unless a white swan comes along.