Stocks will fall another 10% if the technical recession turns into stagflation

As if it were a tightrope walker, the bags of Europe walk in the last hours on the wire. The new threats from the President of Russia, Vladimir Putin, and the announcement by the US Federal Reserve of another rate hike of 75 points (up to 2008 highs) in the price of money, have given new airs to the Bears in Western equity markets.

The Red numbers spread again across the trading floors on both sides of the Atlantic in Thursday’s session, favoring Europe yield first supportswhich eliminate the bullish hypothesis of seeing a larger rebound and leave alone in the face of danger to the version Total return of the same index and the Daxwhich still support their respective key soils, according to Joan Cabrero, advisor to eco trader. In this sense, if this happens, the interpretation is that it would be quoting a hard scenario of stagflation rather than the technical recession that has been discussed so far.

The 3,450 points of Euro Stoxx 50 they were the first level that pointed from eco trader as a key in the upward trend of the continental stock markets in the coming weeks and yesterday they yielded, as had already happened in some of the last sessions.

The German Dax for its part holds on the 12,400 points, level that is close to 3% of the closing levels of yesterday’s session and the Ibex 35 has managed to remain above the key support that the 7,765 points.

“Losing those levels means that the chances that we can see a bullish counter-attack vanish, favoring now that we only have to attend to the rest of the supports and don’t look beyond goals“, points out Joan Cabrero, who warns precisely that the loss of these levels in a generalized way would open the door to attend additional cessions in the benchmark indices in Europe close to 10%.

You also have to watch the 7,500 integers of the EuroStoxx 50 in its version Total return, which is the one that contemplates the reinvestment of dividends; the 12,400 points of the Dax and, in the case of the Ibex 35, the 7,765 points, “which in this case are not the minimums of March and July, but are the analogous levels”, specifies the expert. It is about the lows of March and “already in July also halted falls in European stock markets“, explains the analyst of the premium portal, who also highlights that to make operational decisions it is preferable to see a generalized loss of these references rather than the occasional transfer of a single index.

Technical recession or stagflation

It seems clear, therefore, that the loss of these levels – the 7,500 points of the EuroStoxx 50 Total return, the 7,765 points of the Ibex 35 and the 12,400 of the Dax– and the consequent 10% drop in the market, what I would discount is the probability of seeing a scenario of stagflation in Europe and the US (accelerating inflation coexisting with reduced growth rates) for a prolonged period of time, instead of think in a context of technical recession, which is what is discounted at current price levels and that would mean seeing negative growth probably only during the last quarter of this year and the first of next.

In this context, the decisions made by the central banks in the next monetary policy meetings seem key for the stock markets to opt for one or the other scenario. “The domestic demand in Europe in the last twenty years shows that it is not enough to have rates as high as in the United States. Now, in addition, the indebtedness is very high and that debt has to be paid and if it is more expensive to pay it because of the rate hike, there is less growth potential. If rates rise further in Europe, financing would be more expensive and the economy would not withstand it,” says Miguel Jiménez, manager of mixed funds at Renta 4 Gestora, who predicts that “for the next economic cycle, we are going to have rates that are not very high compared to what we have had in 2010-2020, and we do not see them at 4%-5% in Europe”.

Schroders sees “optimistic” to think that at this point a recession can be avoided

From the manager they also point out that a higher price of money in the short term supposes a risk of recession in the medium and long term that regions such as the Old Continent cannot afford. Not surprisingly, demography and productivity have historically been key for Europe to generate growth and “now we are not particularly good at either,” Jiménez explains.

“It is optimistic to think that a recession can be avoided and, in our opinion, any possibility of a soft landing is gone“, highlights George Brown, economist at Schroders following the last appearance of the president of the Federal Reserve, Jerome Powell.

“We believe a recession will be necessary to control inflation and we expect the US economy to contract by around 1% in 2023. Raise rates to around 4% should be enough to achieve the goal, and there are signs that the tightening of financial conditions is beginning to have an effect. All our six monetary indicators of recession, except one, are in the red”, he adds. And more so after the statements of the Fed president himself and the entity’s forecasts, which highlight that the probability of a soft landing of the economy had diminished.

The euro seeks a rebound against the dollar without success

Thursday was a swing session for the euro/dollar. After delving into their lows for the year (and for the last 20 years) during the first moments of the session, the pair recovered the lost ground and then lost it again. “To think that a rebound can be sustainable, it should beat 1.02 integers,” says Cabrero, something unlikely given the strength of the ‘green ticket’ in recent sessions in which it has revalidated its highs against its most traded crosses , including the yen.


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J. A. Allen

Author, blogger, freelance writer. Hater of spiders. Drinker of wine. Mother of hellions.

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