• Fear of recession growing
• Downturn “already very close” according to Roubini
• Geopolitical risks weigh on the market
JPMorgan analysts predict recession with 35% probability
The high level of inflation and countermeasures by the central banks are currently causing uncertainty on the market. In order to get the strong price pressure under control, the monetary watchdogs are raising interest rates worldwide. With the new measures, however, fears of an economic downturn are growing on the capital market. Experts at the major US bank JPMorgan recently stated that the risk of a recession was 35 percent, as reported by Dow Jones Newswires. Although economic output will initially be able to increase further, growth is likely to be throttled further and further with further interest rate hikes by the Fed. “Our forecast assumes that the Fed will achieve a soft landing at least by the end of next year,” read the forecast of the strategists.
Fear of recession also reaches corporations like Tesla
The fear of recession has now also reached the companies themselves. Tesla boss Elon Musk recently announced numerous layoffs at the electric car manufacturer because he had a “super bad feeling” about the economy, as the news agency “Reuters” reported, citing an internal email from the entrepreneur. “A recession is inevitable at some point. Whether there will be a recession in the near future is more likely than unlikely,” the Dogecoin fan recently confirmed to the Bloomberg agency at the Qatar Economic Forum in Doha. “It’s not a certainty, but it seems more likely than not.”
Nouriel Roubini warns of impending recession
The economist Nouriel Roubini, nicknamed “Dr. Doom” because of his pessimistic forecasts, was also invited there. As the market observer told the news agency, the economy is not currently in a recession – not yet. “We are not yet in the recession, but we are coming very close,” was the verdict of the expert. “If you look at retail sales, if you look at manufacturing metrics, if you look at housing construction, they’re all slowing down really badly and inflation is still really high. That’s stagflation. It’s not just a recession.” As the reason for the economic slack, Roubini sees a series of negative stimuli, including supply chain problems from the COVID pandemic, Russia’s war of aggression in Ukraine and rising commodity prices. “These are all shocks that reduce economic growth,” said the economist. A recession by the end of the year is therefore the most likely case.
Stock market could collapse by up to 50 percent
But what are the likely consequences of stagflation for stock and bond markets? Typically, the US stock market falls by up to 35 percent in a recession, but in a stagflation environment, the minus can carry up to 50 percent, according to Roubini. This can be explained by the double burden of the recession on the one hand and the persistently high inflation on the other. Normally, the bond market also benefits from falling stock prices and vice versa, but in the event of stagflation, both asset classes are equally affected.
When asked what is the lesser evil, pausing the Fed’s interest rate policy or pushing ahead with rate hikes, regardless of the economic situation, the expert gave a clear answer. Should interest rate hikes be stopped, inflation expectations would increase significantly. Therefore, the monetary authorities are forced to stick to their strategy. “So the Fed has no choice but to continue tightening, even if it will be a hard landing.”
Bank of Japan sticks to low interest rate strategy – for now
The strong US dollar, which is being driven by interest rate increases but is also putting pressure on other currencies, is currently causing uncertainty in the market. The Japanese yen has therefore also come under significant pressure recently. In addition, the Bank of Japan, in contrast to most other central banks, is sticking to its low interest rate policy. “Well, if the yen continues to fall, and it will fall further given the divergence between BoJ policy and that of other central banks, at some point inflation will become a problem for the BoJ and they will abandon the zero interest rate and try to stretch the yield of 10-year government bonds,” Roubini pointed out. A level of 140 yen per US dollar could therefore lead to a turnaround in interest rates.
Market expert Jim O’Neill recently told Bloomberg that an Asian financial crisis could be triggered if the dollar-yen exchange rate hits the 150 mark.
“Dr. Doom” lowers the thumb for Bitcoin & Co.
The economist also briefly mentioned his assessment of Bitcoin & Co. “In my opinion, the value of most cryptocurrencies is zero, so we’re still a long way from that,” Roubinis said. “So I’m still very pessimistic about that and how to sustain the market.”
In the coming months, the market will also have to digest a number of geopolitical risks that investors are unlikely to play into their hands. “Of course, the war between Russia and Ukraine could intensify. We don’t know what will happen to relations between Israel and Iran. And in Asia there are tensions over the Taiwan issue,” said the expert. “So I would say that geopolitical risks are the things that worry me the most.”
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