# Interest rate and recession fears knock stocks and oil
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-08-31
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Euro Zone Inflation Hits Record High Amid Recession Fears
Meta Description: Stay updated on record-high euro zone inflation and looming recession fears as central banks prepare to raise borrowing costs. Market impacts and analysis
URL: https://financedigest.com/interest-rate-and-recession-fears-knock-stocks-and-oilhtml

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By Huw Jones

LONDON (Reuters) – Record-high inflation in the euro zone compounded recession fears stalking markets on Wednesday as central banks on both sides of the Atlantic prepared to raise borrowing costs for businesses and households again next month.

Wall Street was set for a muted start as U.S. crude oil prices sank for a second day, trading below $90 a barrel on worries about demand in a struggling global economy, while untamed [inflation knocked the euro and sent investors](https://www.financedigest.com/hotel-investors-should-they-be-worried-about-a-potential-economic-pause-delving-into-inflation-interest-rates-recession-etc.html "‘Hotel Investors – should they be worried about a potential economic pause?’ delving into inflation, interest rates, recession etc") to the safe haven dollar.

The MSCI all-country stock index eased 0.2% on the day and was down 18.5% for the year as war in Ukraine, surging energy prices and rising [interest rates](https://www.financedigest.com/interest-rates-are-cut-to-an-all-time-low-what-will-this-mean-for-small-businesses.html "Interest rates are cut to an all-time low. What will this mean for small businesses?") take their toll on risky assets.

The STOXX [share index of 600 companies dropped 0.5% to a six-week low](https://www.financedigest.com/credit-suisse-shares-hit-record-low-after-report-bank-is-looking-to-raise-cash.html "Credit Suisse shares hit record low after report bank is looking to raise cash"), leaving it down about 14% for the year.

U.S. e-mini equity futures pointed to slightly firmer start on [Wall Street](https://www.financedigest.com/wall-street-stocks-power-higher-as-treasury-yields-and-dollar-ease.html "Wall Street stocks power higher as Treasury yields and dollar ease") for the S&P 500 after its 1.1% slide on Tuesday.

Economic news remained grim with overnight data showing that economic activity in China, the world’s second-largest economy, extended its [decline this month after new COVID](https://www.financedigest.com/roche-flags-2023-earnings-decline-on-slump-in-covid-products.html "Roche flags 2023 earnings decline on slump in COVID products") infections, the worst heatwaves in decades and struggles in the property sector.

Headline euro zone inflation for August in the euro zone rose to another record high, [beating expectations and solidifying the case for a hefty rate](https://www.financedigest.com/beat-the-exchange-rate-and-buy-that-dream-holiday-home-by-paying-in-pounds.html "Beat the exchange rate and buy that dream holiday home – by paying in pounds! ") hike by the European Central Bank on Sept. 8.

Russia halted gas supplies via a major pipeline to Europe on Wednesday for three days of maintenance amid doubts it won’t be switched back on, adding to worries of energy rationing during coming winter months in some of the region’s [richest countries](https://www.financedigest.com/richest-countries-in-the-world.html "Richest countries in the world"). The [energy crunch has already created a painfulcost-of-living crisis for consumers and businesses and forcedgovernments to spend billions](https://www.financedigest.com/petrofac-hitachi-energy-receive-14-billion-agreement-from-tennet.html "Petrofac, Hitachi Energy receive billion agreement from TenneT") to ease the burden.

German bonds were [set for their worst month in over 30 years as euro zone inflation hit](https://www.financedigest.com/uk-economy-set-for-smaller-hit-in-2023-than-previously-feared-imf.html "UK economy set for smaller hit in 2023 than previously feared – IMF") a record high.

![German 2-year bond yield set for biggest monthly jump since 80s](https://www.globalbankingandfinance.com/wp-content/uploads/2022/08/085.jpg)

(Graphic: [German 2-year](https://www.financedigest.com/german-regulator-hands-ey-2-year-audit-ban-over-wirecard-scandal-handelsblatt.html "German regulator hands EY 2-year audit ban over Wirecard scandal – Handelsblatt") bond yield set for biggest monthly jump since 80s, https://fingfx.thomsonreuters.com/gfx/mkt/znpnewdbkvl/DE3108.png)

[Markets are betting](https://www.financedigest.com/tough-times-and-risky-business-which-emerging-market-assets-are-a-bet-worth-taking.html "Tough times and risky business – which emerging market assets are a bet worth taking") that the U.S. Federal Reserve and the [ECB will both raise their key borrowing costs by 75 basis points when they meet](https://www.financedigest.com/sterling-steadies-vs-dollar-ahead-of-boe-ecb-meetings.html "Sterling steadies vs dollar ahead of BoE, ECB meetings") next month.

Jamie Niven, a senior bond fund manager at Candriam, said [rate hikes](https://www.financedigest.com/oil-up-2-as-dollar-weakens-on-small-us-fed-rate-hike.html "Oil up 2% as dollar weakens on small US Fed rate hike") anticipated for this year had been largely priced into markets, especially in the United States.

[Investors have begun pricing](https://www.financedigest.com/oil-prices-steady-as-news-of-saudi-russia-meeting-calms-investors.html "Oil prices steady as news of Saudi, Russia meeting calms investors") out previously anticipated rate cuts next year following Fed Chair Jerome Powell’s hard-hitting speech last week.

I think there is more pain to come in credit markets and in equity markets before we [see a brighter outlook](https://www.financedigest.com/britains-next-sees-lower-profit-in-2023-as-consumer-outlook-darkens.html "Britain’s Next sees lower profit in 2023 as consumer outlook darkens"). I don’t think [central banks](https://www.financedigest.com/stock-pickers-reckon-its-time-to-move-on-from-central-banks.html "Stock pickers reckon it’s time to move on from central banks") are going to be in a state where they can cut to kind of soften the blow of recession,” Niven said.

While there may be occasional quick flips or dramatic [rallies back into riskier assets like stocks](https://www.financedigest.com/asian-stocks-rally-as-bank-jitters-calm-alibaba-lifts-mood.html "Asian stocks rally as bank jitters calm, Alibaba lifts mood") at times, they will ultimately be lower towards the end of the year, Niven said.

U.S. non-farm payrolls data due on Friday could make the case for a [big rate hike](https://www.financedigest.com/stocks-falter-as-economic-worries-nag-nz-delivers-big-rate-hike.html "Stocks falter as economic worries nag, NZ delivers big rate hike"), analysts said.

U.S. CRUDE BELOW $90 A BARREL

In Asia overnight, Japan’s Nikkei sagged 0.4% and Chinese blue chips were [little changed](https://www.financedigest.com/stocks-dollar-little-changed-as-inflation-data-sends-mixed-signals.html "Stocks, dollar little changed as inflation data sends mixed signals"). [Hong Kong’s](https://www.financedigest.com/citadel-accelerates-hiring-push-in-hong-kong-and-london.html "Citadel accelerates hiring push in Hong Kong and London") Hang Seng was down 0.16%, recovering from steep early declines.

The two-year U.S. [Treasury yield](https://www.financedigest.com/wall-st-indexes-mixed-treasury-yields-tick-up-as-higher-rates-loom.html "Wall St indexes mixed, Treasury yields tick up as higher rates loom"), which is relatively more sensitive to the monetary policy outlook, hit a 15-year high at 3.497% overnight, but eased back to 3.4786%.

The 10-year [Treasury yield](https://www.financedigest.com/stocks-fall-treasury-yields-rise-upon-final-2022-trading-day.html "Stocks fall, Treasury yields rise upon final 2022 trading day"), which hit a two-month high of 3.153% on Tuesday, stood at 3.1418%.

The [dollar index gained](https://www.financedigest.com/stocks-mixed-dollar-gains-after-robust-inflation-jobs-data.html "Stocks mixed, dollar gains after robust inflation, jobs data") 0.3% to 109.14, after starting the week by marking a two-decade high at 109.48.

Sterling is set for its worst month since late 2016 against the [dollar as UK inflation](https://www.financedigest.com/stocks-and-gold-cheer-u-s-inflation-picture-while-dollar-slides.html "Stocks and gold cheer U.S. inflation picture, while dollar slides") is already at 10% and rising, with the Bank of England set to increase rates next month.

Gold fell 0.7% to $1,710 an ounce, a one-month low.

[Crude oil](https://www.financedigest.com/oil-dips-after-fed-comments-us-crude-stock-build.html "Oil dips after Fed comments, US crude stock build") fell further after declines of more than $5 overnight, but drew support after industry data showed U.S. [fuel stocks fell more than expected](https://www.financedigest.com/global-fuel-injector-cleaner-market-emerging-economies-expected-to-influence-growth-until-2031.html "Global Fuel Injector Cleaner Market: Emerging Economies Expected to Influence Growth until 2031").

U.S. West Texas Intermediate (WTI) crude futures were down 3.3% at $88.55 a barrel, after sliding $5.37 in the previous session driven by [recession fears](https://www.financedigest.com/banking-turmoil-means-recession-fears-are-creeping-back.html "Banking turmoil means recession fears are creeping back"). Brent crude [futures for October fell 3.6%](https://www.financedigest.com/heightened-interest-in-global-cuisines-to-brighten-the-expansion-prospects-of-herbs-and-spices-manufacturers-industry-predicted-to-rise-at-3-6-cagr-future-market-insights-inc.html "Heightened Interest in Global Cuisines to Brighten the Expansion Prospects of Herbs and Spices Manufacturers: Industry Predicted to Rise at 3.6% CAGR | Future Market Insights Inc. ").

On a brighter note, cryptocurrencies staged a rebound, with bitcoin up 2.8% at $20,383.

(Reporting by Huw Jones; Editing by Edmund Klamann and Nick Macfie)


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