Bonds Rally, Commodities Drop On Recession Angst: Markets Wrap

(Bloomberg) -- Treasuries rallied, stocks tumbled and the prices of commodities fell as recession fears continue to grip markets, outweighing the optimism over US-China talks aimed at tariff reductions. 

The S&P 500 trimmed losses after briefly dropping more than 2% while the tech-heavy Nasdaq 100 wavered. Treasury yields declined, with the 10-year yield around 2.79%.

The dollar rose to its strongest level in more than two years, making commodities priced in the currency less attractive. West Texas Intermediate crude futures dropped below $100 a barrel for the first time since May 11 while copper, which is considered an economic bellwether, fell to its lowest in 19 months. Energy and mining stocks plunged as commodities declined, dragging the S&P 500 lower. 

Investors continue to fret over a potential US recession and stubborn inflation despite talks of tariff reductions. US and Chinese officials held discussions after reports that Washington is close to rolling back some of the trade levies imposed by the former administration. Reducing tariffs on imported Chinese goods could impact consumer prices in the US, but some suggest that it could do little to cool inflation. 

“With the first half of the year moving into the rear-view mirror investors can't help but wonder what lies ahead in a year that thus far has wrought heightened levels of uncertainty, disruption and dysfunction that has rattled asset class values across the spectrum of the good, the bad, and the ugly,” said John Stoltzfus, chief investment strategist at Oppenheimer & Co.

Data released Tuesday also showed durable goods orders and factory orders rose more than expected in May.

The odds of a US recession in the next year are now 38%, according to latest forecasts from Bloomberg Economics. Signs of a rapidly deteriorating US economic outlook have now spurred bond traders to pencil in a complete policy turnaround by the Federal Reserve in the coming year, with interest-rate cuts in the middle of 2023.

“If the Fed changes course now, they might as well pack their bags and turn the lights off,” Kenneth Polcari, senior market strategist for Slatestone Wealth LLC, wrote in a note. “Yes, the economy is slowing but inflation continues to be an issue and that is the focus now.”

In Australia, the central bank raised its key interest rate as expected to 1.35%. It's among more than 80 central banks to have raised rates this year. The nation's dollar weakened after the decision.

In Europe, equities dropped to the lowest since January 2021 ahead of the earnings season, which investors are watching closely to see whether corporate profit growth can handle inflation and supply constraints. 

Bitcoin fell, trading below the $20,000 level. 

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What to watch this week:

• FOMC minutes, US PMIs, ISM services, JOLTS job openings, Wednesday
• EIA crude oil inventory report, Thursday
• Fed Governor Christopher Waller, St. Louis Fed President James Bullard, scheduled to speak, Thursday
• ECB account of its June policy meeting, Thursday
• US employment report for June, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.3% as of 12:33 p.m. New York time
• The Nasdaq 100 rose 0.1%
• The Dow Jones Industrial Average fell 1.7%
• The MSCI World index rose 0.3%

Currencies

• The Bloomberg Dollar Spot Index rose 1.1%
• The euro fell 1.7% to $1.0245
• The British pound fell 1.6% to $1.1927
• The Japanese yen fell 0.2% to 135.83 per dollar

Bonds

• The yield on 10-year Treasuries declined nine basis points to 2.79%
• Germany's 10-year yield declined 15 basis points to 1.18%
• Britain's 10-year yield declined 15 basis points to 2.05%

Commodities

• West Texas Intermediate crude fell 8.3% to $99.43 a barrel
• Gold futures fell 1.9% to $1,767.80 an ounce

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