‘Very challenging’, indeed

Market optimism couldn’t survive to Jerome Powell’s testimony yesterday, as he said that a recession is possible, and that calling a soft landing is ‘very challenging’ under the current circumstances.  

More worryingly, Powell mentioned another risk: the risk of the Federal Reserve (Fed) not managing to restore price stability and allowing inflation to get entrenched in the economy.  

Major US indices closed the session slightly in the negative. The S&P500 lost 0.13% and Nasdaq slid 0.15%. The US 10-year yield eased however, as a sign that Powell’s testimony was already mostly factored in. The US dollar index eased.  

Powell will testify today, as well, but most of the negative pricing is certainly done by now. 

Finally falling? 

The barrel of American crude extended losses below $103 yesterday, as Powell’s speech pointed at a possible recession. The next important test for the oil bears is the $100 level. Many investors don’t expect a downturn in oil prices below this level, pointing at a tight global supply, and the resilient demand. Joe Biden’s 3-month gas tax relief could only increase demand and have no material impact for the overall market trend.  

Other commodities suffer, as well, as the recession fear takes a toll on demand prospects and bring investors to liquidate their long positions in preparation of a further downside correction. iShares Diversified Commodity index fell below the 100-DMA for the first time this year, and deeper decline is possible, given the risks of tighter monetary policies to the global economy. 

In this respect, the British FTSE index, which has a high concentration of oil and mining stocks, could lose its ytd advance versus its US peers.