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Markets meltdown: Is a recession coming?

The current market turbulence has raised alarm bells among investors, who fear that the world’s largest economy may be teetering on the brink of recession

Markets meltdown
The potential for recession in some of the world's largest economies remains a key concern. Image: Reuters

Investors from across the globe are bracing for further volatility after fears that the US economy could be moving towards a recession sent shockwaves in global markets since the end of last week.

The stock market turbulence is being driven by growing concerns about the health of major economies. Experts are closely monitoring economic indicators and market trends to gauge the potential for a broader economic downturn.

The catalyst for the latest bout of market jitters was a series of disappointing economic data releases from the US, coupled with underwhelming results from tech giants Amazon, Alphabet, and Intel. These developments have raised alarm bells among investors, who fear that the world’s largest economy may be teetering on the brink of recession.

Is the economy headed into a recession?

“There is not a simple answer to this question because the economy is complex. We are always talking probabilities for a recession until it is there,” said Peter Garnry, Chief Investment Strategist at Saxo Bank.

According to him, the “most optimistic economists” have increased their recession probability to 25 percent while “more bearish economists are at 50 percent and some even sure it is already here.”

In his view, there is a 33 percent probability of a recession, but he cautions that there are still too many economic indicators that are not aligned with an incoming recession.

“The US economy is still growing around the 2 percent real GDP growth rate and Europe’s economic activity has recently improved a lot. If we are right the setback in equities will prove to be an opportunity for long-term investors,” he noted.

Chris Weston, an analyst at the US online stockbroker Pepperstone, emphasised the critical juncture at which global markets currently find themselves.

“What really matters now is whether money managers and traders feel sentiment has become too pessimistic, or if this deleveraging and risk aversion manifests into even higher volatility and drawdown,” he said.

He also added that market participants are eagerly awaiting upcoming economic data to gain greater clarity on the risk of recession and its potential impact on earnings expectations, consumer behaviour and business decisions.

The recent US jobs report for July has been a particular source of concern. The data revealed a worse-than-expected slowdown in job creation, with only 114,000 new positions added compared to the anticipated 175,000.

Additionally, the unemployment rate climbed to a three-year high of 4.3 percent, while manufacturing activity slumped to an eight-month low. These figures have intensified worries that the US economy may be more vulnerable to a recession than previously thought.

James St Aubin, chief investment officer at Ocean Park Asset Management, attributes the market’s reaction to what he calls “the curse of high expectations.” He told The Guardian, “So much had been invested around the scenario of a soft landing, that anything that even suggests something different is difficult.”

This sentiment underscores the delicate balance that investors have been trying to maintain between optimism for a gradual economic slowdown and fear of a more severe downturn.

The ripple effects of these concerns have been felt across global markets. In Europe, major stock indices experienced significant declines, with technology stocks falling to their lowest levels in over six months. The French CAC 40 index hit its lowest point since November, while Germany’s DAX lost 2 percent. Asian markets were not spared either, with Japan’s Nikkei 225 index plummeting by 5.8 percent, marking its worst day since the Covid-19 pandemic.

However, not all analysts share the same level of alarm. Art Hogan, chief market strategist at B. Riley Wealth, offers a more measured perspective on the situation. “This isn’t a Category 3 hurricane, but we are seeing how markets react to signs that the economy is normalising after turning hot in the first half of this year,” Hogan said. He suggests that the market’s reaction may be somewhat exaggerated, with investors seizing on any excuse to take profits after a period of substantial gains.

Indeed, despite the recent losses, the S&P 500 has still posted a 12 percent gain for the year, while the tech-heavy Nasdaq has risen by nearly 12 percent. These figures indicate that, prior to the recent turbulence, investors had been relatively optimistic about the economic outlook, buoyed by cooling inflation and gradually slowing employment figures.

The current market volatility has also had implications for other asset classes. As stocks declined, gold prices surged to new record highs, reflecting investors’ flight to safe-haven assets. Conversely, the US dollar weakened, and oil prices experienced a significant drop, with the cost of a barrel of Brent crude falling from nearly $88 to below $78 over the past month.

Looking ahead, market participants will be closely monitoring a slew of economic data and corporate earnings reports in the coming weeks. In the US, figures for the services sector and unemployment claims will be particularly scrutinised. Other major economies, including the UK, China, and Japan, are also set to release important economic indicators, which could further influence market sentiment.

The potential for recession in some of the world’s largest economies remains a key concern. Germany, for instance, has already shown signs of economic weakness, prompting analysts to warn of a possible recession. Similarly, Japan’s recent interest rate hike led to a sharp decline in the Nikkei index, highlighting the delicate balance central banks must strike in managing monetary policy.

As global investors navigate these uncertain waters, the interplay between economic data, corporate performance, and policy decisions will be crucial in determining the trajectory of financial markets. While some experts caution against overreaction, others stress the importance of remaining vigilant in the face of potential economic headwinds.

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Tala Michel Issa

Tala Michel Issa

Tala Michel Issa is the Chief Reporter at Arabian Business and Producer/Presenter of the AB Majlis podcast. Her interviews feature global figures including former Nissan Chairman Carlos Ghosn, Mindvalley's...