Bonds surge as Euro-area data raise recession fear

BLOOMBERG

Investors fled into the safety of bonds and stocks fell, as a lurch towards higher interest rates together with weak euro-area activity data heightened anxiety that aggressive central bank policy will tip economies into recession. Global stocks headed for their biggest weekly decline in more than three months. European shares slipped, with a record 36% drop in Siemens Energy AG’s shares after a profit warning dragging on the broader market. Defensive sectors such as healthcare gained. US index futures fell.
The second-quarter stock rally is fraying under the threat of more rate hikes and fears that the full economic impact of aggressive central bank policy has yet to be felt. Federal Reserve Chair Jerome Powell said the US may need one or two more rate increases in 2023. While Treasury Secretary Janet Yellen sought to temper concerns over a US recession, she acknowledged the risk and said a consumer spending slowdown was needed. “The market is too confident that the Federal Reserve can engineer a soft landing,” said Ryan Belanger, founder and managing principal at Claro Advisors. “We believe it is wise for investors to take profits in stocks thanks to this year’s rally and consider reinvesting those proceeds into high quality bonds.”
A rally in European bonds sent five-year German yields plummeting as much as 16 basis points to 2.48%, putting them on course for the biggest drop since April. US Treasuries yields fell in sympathy, with the 10-year benchmark note shedding 5 basis points. Germany’s economic activity lost much more momentum than anticipated in June, driven by a slowdown in services and sustained weakness at the country’s factories, according to business surveys by S&P Global. Separate data for France showed its economy probably slumped in the three months through June. The euro fell sharply following the figures.
Concern about the economic outlook was reflected in a rotation into bonds and out of stocks in weekly flow data. Investors yanked $5 billion from global equity funds and added $5.4 billion to bonds.  US stocks face more downside than upside over the next two months as banks and property firms “still have bad recession vibes,” according to the note from Bank of America strategists citing EPFR Global data.
The Bank of England unexpectedly raised its benchmark interest rate by a half percentage point and warned it may have to hike again, casting doubt over whether it can engineer a soft economic landing. With a rise in UK retail sales in May, money markets fully priced a terminal policy rate of 6.25% in February.