Swissquote Bank: Recession fears

July 19, 2022

By Ipek Ozkardeskaya, Senior Analyst, Swissquote Bank 

The US dollar was softening, and equities were recovering, when the market mood suddenly turned sour on news that Apple would slow hiring and cut spending in some businesses due to the recession fears, and Gazprom declared force majeure. 

Elon Musk recently announced he would cut 10% of jobs in Tesla, because he has a bad feeling about the economy. Alphabet, Amazon, Meta, Snap and even Goldman announced they would need less people to work for them as businesses would slow.

And the slowing jobs news is feeding into recession worries, worries that the economy will really start slowing this time, as a result of tighter monetary conditions from the Federal Reserve (Fed), to fight inflation.

The S&P500 reversed early-session losses to close the session 0.84% lower on Monday. Nasdaq lost 0.81%. Apple, the main responsible for yesterday’s selloff closed the session more than 2% down, after having advanced past the $150 per share for the first time since the beginning of June.

Crude oil kicked off the week on a positive note, as Joe Biden’s visit to Saudi Arabia only served to escalate tensions between the two nations, instead of melting ice following Khashoggi’s murder in 2018.

As a result, OPEC said that they will rely on their market logic to decide how much oil they would pump. The barrel of crude is above $100 level.

But, even if OPEC decided to remain timid on its oil production, the higher oil prices is the main reason that investors are preparing for recession. And the recession worries are what pull the oil prices lower. Therefore, we expect to see solid resistance into the $108/110 area, near 50 and 100-DMA respectively.

A bizarre force majeure

Another reason that hit the market sentiment yesterday was the news that Gazprom declared force majeure starting from June 14th on the back of a gas turbine, that is stuck in Canada following repairs due to sanctions.

Canada said it will release the part, but the news suggests that there’s no chance of the turbine being returned before July 21, to allow Nordstream 1 operate again this Thursday.

In the camp of more vicious predictors, Russia will restore the German gas supply this week, to prove the Europeans wrong, earn some more revenue, then cut the gas.

In all cases, Europe will unlikely bypass a worsening energy crisis and avoid recession. Plus, the euro zone will possibly experience another debt crisis, and the political landscape will likely deteriorate as the European economies sink into darkness.

The EURUSD is better bid since Monday, not because there is more faith in the euro but, because the dollar is broadly softer. The EURUSD could consolidate and extend gains, if and only if the dollar kept softening.

Today…

We don’t have much on today’s economic calendar that would send the US dollar sharply higher, the FOMC members are also at their quiet period before next week’s meeting.

So, what will matter are the next earnings. Today, Netflix will release its latest earnings, and will likely reveal further weakness in subscriptions. If that’s the case, we could see the Netflix shares take another hit. But, because the expectations are low, we could also see a positive surprise this quarter.