Marketmind: Batten down the hatches

BY Reuters | ECONOMIC | 05/20/22 03:02 AM EDT

A look at the day ahead in markets from Saikat Chatterjee.

Markets are starting to buckle in a week where the world's top central bank issued its most dire warning yet on the need to kill surging inflation, just as fresh signs of rapidly deteriorating growth outlook emerged.

An index of world stocks is poised for its worst losing streak on record. Safe-haven gold is down nearly 4% this quarter. Safe-haven government debt, with prices on 10-year U.S. Treasuries down more than 10% so far this year, have been given a bit of respite.

And though U.S. and European stock futures are rising on Friday after China cut its benchmark reference rate for mortgages to support a struggling economy, there is a growing fear that the world economy is lurching towards recession.

Berenberg economists say the chance of a mild U.S. recession is roughly 40%. And UK consumer moral hit its lowest since records began in 1974, data released Friday shows.

But there seems to be no stopping policymakers. On Wednesday, Federal Reserve chief Jerome Powell said officials are prepared to take interest rates as high as needed to kill inflation. Even some officials at the dovish European Central Bank are talking about an aggressive 50 bps hike in July.

What will turn this around? Global central banks releasing their tightening grip on monetary policy? A cessation of the Ukraine-Russia conflict or China relaxing its zero-COVID tolerance?

There is no sign of any of these happening in the foreseeable future. An index of U.S. financial conditions is still in loose territory and distance away from a pandemic-era high. So batten down the hatches and prepare for more pain.

Key developments that should provide more direction to markets on Friday:

UK consumer morale hits lowest since records began in 1974: GfK

German April PPI, advance eurozone consumer confidence

Speaker corner: ECB's Muller, Kazaks, Centeno, De Cos, Bank of England's Huw Pill.

(Reporting by Saikat Chatterjee; Editing by Dhara Ranasinghe)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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