Brent crude slumped below $100 on Wednesday for the first time since April, as concerns about a looming recession intensified.
The international oil benchmark fell as much as 3.5 per cent to $99.15 per barrel, reversing gains earlier in the session. Brent had fallen more than 9 per cent on Tuesday as signs of an economic slowdown spooked investors.
US marker West Texas Intermediate traded at $96.19 per barrel, having dropped below $100 on Tuesday.
In a further sign of the darkening market outlook, the euro extended its losses, slumping 0.9 per cent against the dollar to $1.018 — in a move that took the common currency below $1.02 for the first time in two decades. Meanwhile, the dollar — seen as a shelter during times of rising uncertainty — continued to strengthen, after an index measuring the US currency against a basket of six others rallied in the previous session.
“Continued Fed tightening amidst a global slowdown remains a very positive environment for the dollar,” wrote analysts at ING, who added that such an environment could lead the dollar index to “trade some 2 per cent higher, meaning that EUR/USD looks likely to drift towards parity this month”.
“1.00 is probably the biggest psychological level around in FX”, said ING, “and fireworks look likely” when it happens.
Short-dated US government debt came under selling pressure on Wednesday, leaving the yield on the policy-sensitive two-year bond above that of the benchmark 10-year note, after the two yields inverted on Tuesday for the third time this year. So-called inversions, when yields on 10-year Treasury notes fall below those of their shorter-dated counterparts, have preceded every US recession in the past half-century.
Elsewhere in sovereign debt markets, the yield on Germany’s two-year bond fell 0.05 percentage points to 1.11 per cent. Bond yields fall as their prices rise.
In equity markets, Wall Street’s S&P 500 and the tech-heavy Nasdaq Composite moved between small gains and losses.
Data compiled by Nick Colas, co-founder of DataTrek Research, showed that dollar peaks correlated with the exact days of lows for the S&P 500 in 2009 and 2020. “The dollar has given useful information at prior major US large-cap equity lows,” he said. “The fact that it continues to strengthen versus the euro, pound and other currencies tells us to expect further US equity volatility.”
Expectations of an economic slowdown had on Tuesday pushed the Nasdaq higher, leading it to close up 1.7 per cent as investors ploughed into companies such as Amazon and Facebook owner Meta, which are typically expected to sustain earnings growth during times of market stress.
Aggressive monetary policy tightening has hammered the valuations of tech companies this year, with the prospect of higher interest rates biting into their projected cash flows and earnings.
But fears of a slowdown have in recent weeks brought down investors’ expectations of how far the US Federal Reserve will raise interest rates. Markets are now pricing in a benchmark rate of roughly 3.3 per cent by February 2023, down from expectations of 3.9 per cent just over three weeks ago.
Futures markets also reflect scaled-back projections for rate rises in the eurozone.
Europe’s Stoxx 600 share gauge rallied almost 2 per cent on Wednesday, pushed up by a sharp rise in the shares of Just Eat Takeaway after Amazon agreed to take a stake in the company’s Grubhub arm and by stronger than expected German industrial data.
In Asian equity markets, Hong Kong’s Hang Seng lost 1.2 per cent as new Covid-19 outbreaks compounded recession worries.
Elsewhere, the pound lost 0.5 per cent against the dollar to hit $1.1898 as more UK ministers resigned from Boris Johnson’s government, following Rishi Sunak’s resignation as chancellor on Tuesday night.