Markets gripped by recession fears, US CPI in focus

Asian shares were a sea of red on Tuesday as recession fears and China’s renewed Covid-19 outbreak smothered appetite for risk. Overnight, Wall Street’s main indices took a beating as investors sprinted to safety ahead of the US inflation data and earnings season. In Europe, stocks are expected to open lower due to Europe’s energy shortage and growing caution ahead of key economic data and bank earnings.

In the currency markets, the mighty dollar flexed its safe-haven muscles with the dollar index (DXY) hitting its highest levels since 2002. Meanwhile, the EURUSD parity dream came closer to reality this morning as prices touched 1.0004 for the first time since December 2002. Looking at commodities, gold remains depressed and unloved while oil prices were hit by demand concerns.

The negative vibe and sense of uncertainty across financial markets could fuel further dollar upside while dragging equities lower. Given how markets remain highly sensitive and reactive to anything regarding inflation, tomorrow’s pending US CPI report could spark fireworks. On the data front, Australian consumer sentiment tumbled for the eighth consecutive month in July. Business confidence also disappointed, dragged by global uncertainty, looming hikes, and soaring inflation. Germany’s ZEW economic confidence survey will be published later this morning. A disappointing report could compound the euro’s woes, weakening the single currency further.

It's all about the US inflation report

Wednesday sees the release of the US inflation report with investors watching anxiously to see if prices are rising again or perhaps that we are finally peaking. According to a poll by Bloomberg, inflation is expected to rise 8.8% year-on-year in June compared with 8.6% in May. If expectations meet reality, this would mark the fastest increase in consumer prices since the 8.9% figure back in December 1981! Such a development will most likely reinforce market bets of more aggressive Fed rate hikes, ultimately injecting dollar bulls with fresh momentum.

Other than the US inflation data, it may be wise to keep an eye on the weekly jobless claims report on Thursday. At the end of the week, there will also be a barrage of key releases ranging from the latest retail sales, industrial production, and consumer sentiment which will provide insight into the health of the US economy.

Oil hit by demand concerns

Oil found itself under renewed selling pressure on Tuesday as fresh Covid-19 curbs in China and fears of a global economic slowdown weighed heavily on the demand outlook.

The global commodity is down over 1.5% this morning with an appreciating dollar adding to the pressure and fueling the downside momentum. While fears of a global recession could keep bulls at bay, oil prices remain pulled and tugged by conflicting forces. On one side of the bearish equation, there are recession fears and Covid-19 restrictions in China. However, bulls could draw support from ongoing geopolitical risks and tightening market conditions. President Joe Biden is scheduled to visit Saudi Arabia this week during a tour to the Middle East.

Looking at the technicals, WTI has the potential to target the psychological $100 level if bears can charge through the $102 level. Brent seems to have created fresh resistance around $107.50 with a breakdown below $105 signaling a selloff towards $102.

Commodity spotlight – Gold

Gold is struggling to nurse deep wounds inflicted by last week’s brutal selloff.

The precious metal has been smothered by an appreciating dollar and expectations over the Fed maintaining an aggressive stance towards higher interest rates. Prices are trading around $1730 as of writing, with the next key level of interest found at $1700. The precious metal looks depressed and could be instore for more pain if the pending US CPI report meets or exceeds market expectations. If prices are able to breach $1700, the next key level of interest can be found at $1680.