Stock markets crashed

The US S&P500 lost 9%, while the German DAX30 lost nearly 14% within just 4 days and that all happens in a week when the US Congress lifted the debt ceiling and avoided (at least for now) rating cut. What has happened? The market got scared of a recession.

We pointed at a slowdown in the US economy at the end of April and the slowdown in the global one not much later. Even though major equity indices hit their ’11 high at the beginning of May, they returned close as recently as 3 weeks ago, all that despite the data clearly pointing at a stalling growth. What is more, commodity prices remained elevated even though they are (at least in part) responsible for the slowdown. Consequently investors got punished for this ignorance as the US Q2 GDP data seemed to be a turning point for expectations.

The US S&P500 futures declined sharply after breaking key support at 1255 (we mentioned about that already on Wednesday) and the last support at 1242 and consequently started to fill a large H&S formation. The target for this bearish pattern is at 1247 pts. Coincidentally, that is also a local high from January’10 so we may expect that level to serve as a strong support.  

OIL – cheaper, but not cheap enough

Oil prices finally started to adjust to economic reality. The price of Brent fell to a support at 105 USD per barrel after consolidating in a narrow range of 115-120 USD. This decline comes too late though and is not large enough. Oil prices went down in May but after they jumped back to 120 USD we were becoming less and less optimistic on the recovery prospects as we see expensive oil as a one of key factors behind a global slowdown. In our judgment, the price of oil would need to decline at least to 80-90 USD to offer some breathing room for the global economy. This may take place should the support at 105 USD give up – the next one is a touch below 90 USD per barrel.

Events to watch – US payrolls

The US payrolls report (8.30 ET, 14.30 CET, consensus +90k) is normally the key for investors. Moreover it can be much stronger than in May or June (we think that even +120k is possible). The question is, is that enough to at least stop this tide of panic? Other reports will most likely be irrelevant, possibly with an exception of the Swiss CPI (3.15 ET, 9.15 CET, consensus +0,7% y/y).      

Przemysław Kwiecień PhD, Chief Economist

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