US recession fears ease but markets remain firmly in the red

US stocks recovered some ground after positive survey data on Monday, but remained deeply in the red reflecting concerns that the world’s largest economy might yet be on the cusp of a downturn.

The S&P 500 was trading 2.5 per cent lower on Monday, having dropped 4.2 per cent at the open. The Nasdaq 100 tumbled 5.4 per cent in early trade, but recovered to trade down 2.1 per cent. Both indexes were at their lowest levels since early May.

The Nasdaq Composite, which is dominated by tech giants, has been in correction territory since Friday after falling more than 10 per cent from a record high on 10 July.

It has been hit in recent days by poorly-received financial results and worries over elevated valuations among big names in artificial intelligence, dragging down stocks including Amazon, Intel and Nvidia.

The VIX index, a so-called fear gauge measuring US stock market volatility, jumped to its highest level since the start of the Covid-19 pandemic in 2020.

“The coming months will be a testing time with economic and political uncertainty weighing on the market, as the US heads towards an increasingly unpredictable election,” said Derren Nathan, head of equity research at Hargreaves Lansdown.

Stock markets across Europe and Asia have tumbled over fears that the US economy may be headed for a recession and that its central bank made the wrong decision in holding interest rates at a more than two-decade high last Wednesday.

Latest data for non-farm payrolls, published on Friday, showed a 114,000 increase in July, one of the weakest postings since the Covid-19 pandemic and well below the 175,000 economists had expected, while job growth for the prior two months was revised lower.

The unemployment rate also hit a three-year high of 4.3 per cent, overshooting expectations of 4.1 per cent.

Traders have since piled into bets that the Fed will be forced to aggressively ease monetary policy to avoid a recession, with money markets giving around a 60 per cent chance that policymakers will announce a rare emergency 0.25 percentage point rate cut within a week.

“The US is the world’s most systemically important economy. Downside surprises in the US could have far-reaching consequences for open economies and may influence the upcoming decisions of global central banks,” said Kallum Pickering, chief economist at Peel Hunt.

Analysts at Goldman Sachs have given a 25 per cent probability that the US will slip into a recession, while JPMorgan gave a 50 per cent likelihood.

However, new data out this afternoon should ease fears that the US is facing an imminent downturn.

The ISM services index climbed to 51.4, ahead of expectations and up from 48.8 in June. There was particularly strong growth in the employment index, which will calm investor nerves after last week’s employment report.

Stephen Brown, deputy chief North America economist at Capital Economics, said the data should “soothe recession fears”. He recognised that the index remained “weak” but argued it was “hardly consistent with the economy or labour market falling over a cliff”.

“There was no mention of the dreaded R-word from respondents in the accompanying press release either,” he added.

Similarly, S&P’s purchasing managers’ index (PMI) painted a fairly positive picture, with activity rising “markedly” in July. The PMI came in at 55.0, a little lower than last month but well ahead of the 50 no-change mark.

“The PMI surveys bring encouraging news of a welcome combination of solid economic growth and cooler selling price inflation in July,” Chris Williamson, chief business economist at S&P Global Market Intelligence said.