Crude oil prices tumbled below US$100 a barrel Tuesday and the Canadian dollar lost more than a full cent as the drumbeat of signals over a looming recession got louder.
While inflation had been the market’s preoccupation for much of the past year, traders are now pivoting to prepare for the risks of slowing or even contracting economic growth as central banks jack up interest rates at a faster pace than they have for decades.
Government bond yields Tuesday continued to fall, especially in longer-term issues that more reflect economic trends further out into the future and less the near-term actions of central banks. That sent parts of the U.S. yield curve back into inversion - an unusual state where short-term bonds have higher yields than long-term issues. Historically, yield curve inversions often arrive several months before economies slip in recession.
Copper prices, often followed because of their ability to foreshadow moves in the economy, crumbled about 5 per cent to their lowest in 19 months.
Stocks, too, were posting significant losses Tuesday - although the S&P 500 made a late-day recovery into positive territory. The Canadian benchmark index ended lower, weighed down by steep declines in both energy and materials stocks.
“It seems like the recession warning bells continue to ring a little bit louder each day,” said Thomas Simons, a money market economist at Jefferies in New York.
Currency markets were a major driver of Tuesday’s action across asset classes. The euro sank to its weakest level against the U.S. dollar in almost 20 years, and that strength in the greenback dampened buying interest for commodities.
Recession fears were exacerbated by concerns about an energy crisis in Europe, which has seen a 700 per cent surge in natural gas prices since the start of last year. Fresh data Tuesday showed a sharp slowdown in business growth in Europe in June, which followed news Monday of an unexpected May trade deficit in Germany.
The euro dropped by almost 1.8 per cent against the dollar to $1.0236, its weakest since December 2002. The greenback’s strength weighed heavily on the Canadian dollar, which weakened the most since August last year. By late day, it was trading 1.3 per cent lower at 1.3030 to the greenback, or 76.75 U.S. cents, after touching its weakest since November 2020 at 1.3083.
U.S. West Texas Intermediate (WTI) crude ended 8.2%, or $8.93, lower at $99.50 a barrel. That was its daily percentage decline since March 9 and hit share prices of major oil and gas companies across the globe.
“We’re getting creamed and the only way you can explain that away is fear of recession,” said Robert Yawger, director of energy futures at Mizuho. “You’re feeling the pressure.”
Meanwhile, mass COVID-19 testing in China stocked fears of potential lockdowns that threaten to deepen cuts to oil consumption.
Shanghai said it would begin new rounds of mass testing of its 25 million residents over a three-day period, citing an effort to trace infections linked to an outbreak at a karaoke bar.
The S&P/TSX composite index ended down 194.70 points, or 1%, at 18,834.16, after touching its lowest intraday level since March 2021 at 18,520.38. Energy stocks tumbled 6.8%.
The TSX materials sector, which includes precious and base metals miners and fertilizer companies, declined 4.4% as gold and copper prices tumbled.
In contrast, the technology group advanced 3.6%, helped by a gain of 9.9% for shares of e-commerce giant Shopify Inc as bond yields fell.
The Dow Jones Industrial Average fell 129.44 points, or 0.42%, to 30,967.82, the S&P 500 gained 6.06 points, or 0.16%, to 3,831.39 and the Nasdaq Composite added 194.39 points, or 1.75%, to 11,322.24.
Eight of the 11 major S&P sectors ended down, with communication services leading the gainers and energy notching the largest percentage drop, marking five-month lows.
Benchmark 10-year U.S. Treasury yields fell as low as 2.780%, the lowest since May 27. Canadian government bond yields were lower across a flatter curve, tracking the move in U.S. Treasuries. The 10-year touched its lowest since June 3 at 3.033% before rebounding to 3.083%, down 9.2 basis points on the day.
Fed funds futures traders are now pricing for the Fed’s benchmark rate to peak at 3.29% in February, down from expectations before the Fed’s June 14-15 meeting that it would increase to around 4% by May. It is currently 1.58%.
The Fed will release minutes from its June meeting on Wednesday. Investors will hunt for new clues on how large rate hikes are likely to be over coming months. The Fed is widely expected to hike rates by 75 basis points for the second meeting in a row when it meets on July 26-27.
With files from Reuters
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