Recession fears pull stocks lower, boost gold

Those hoping for Turnaround Tuesday will be disappointed. After a steep selloff in the previous session, European stocks are heading for another bruising day of losses today.

• Oil prices have risen as the US could ban Russian oil imports, despite Europe not agreeing, Russia threatens gas supply
• Recession fears rise as peace talks make little to slow progress, Gold hits $2015
• USD is the FX safe have of choice, EUR recovered off its lows although the outlook remains weak

Little progress in the third round of peace talks, combined with fears that the US will ban Russian oil imports or Russia could limit the European gas supply, are weighing on sentiment, raising concerns of a global recession. The DAX is once again set to underperform European peers heading further into bear market territory.

Oil has been on a roller coaster ride already this week, and it’s only Tuesday! Yesterday Brent hit $130, a 14 year high on fears of US sanctions on Russian oil, only for the price to fall towards $120 after Germany said it wouldn’t support the move. Today, Brent trades back over $125 on news that the US is prepared to press ahead with a ban on Russian oil imports, even if Europe doesn’t. Russia warned that oil prices could even rise to $300 should it close the gas supply to Europe, a move that it is threatening in retaliation to sanctions from the West.

Higher oil prices are fuelling fears that red hot inflation is here to stay. Concerns are growing over the economic impact of the Russia-Ukraine war as commodity prices across the board surge higher and global growth is expected to slow considerably, creating a toxic cocktail, also known as stagflation.

Gold has rallied above $2015, boosted by safe-haven flows and its status as a hedge against inflation.

Sectors

While resource stocks are outperforming, particularly precious metal miners, plenty of sectors are coming under heavy pressure. Airlines are being dumped as fuel costs surge, and flights are cut from Russian destinations. Just as the recovery from the pandemic was taking hold, the sector faces another severe headwind.

The selloff in banks, particularly those exposed to Russia, shows no sign of slowing. Furthermore, doubts are growing over whether central banks will hike interest rates if a global recession takes hold. A low-interest-rate environment hits banks’ net interest income. 

Carmakers are facing surging metal costs as Russian metal supplies are at risk. Like oil, metals have not been a target for Western sanctions on Russia. However, some shippers and buyers are already steering clear of Russian metal exports putting pressure on car manufacturers, which are still dealing with the chip shortage from the pandemic.

FX

Yesterday, the FX market saw the USD return as the safe haven of choice, as the greenback pushed higher versus both the Japanese yen and the Swiss Franc. The US Dollar index rose over 99.00 for the first time since May 2020.

The selloff in the EUR appears to have stalled after EUR/USD fell to 1.08, a fresh 20-month low, and EUR/GBP dropped to a 5-year low on stagflation fears. Investor confidence tumbled to a 16-month low in March, reflecting concerns over the fallout from the Russian invasion. The common currency has since picked up off these historically low levels, although the overall picture remains bearish.