(Kitco News) – Recession fears have surged following the ‘Black Monday’ of 2024 that saw the end of the yen carry trade spark sell-offs in financial markets around the world, with assets from stocks to cryptos and precious metals experiencing sharp declines.
"I believe there is a 40% probability for a recession in H2 2024 (30% shallow, 10% hard landing),” said Aurelie Barthere, Principal Research Analyst at Nansen, in a note shared with Kitco Crypto. “It is above the historical average of 17%."
“Eurozone growth has been weak since 2022 (energy shock from the Ukraine war ) and could potentially be impacted further by hypothetical tariff hikes from the US,” she added. “Chinese growth is weakening as the country is going through the real estate bubble deflating, while the economic war with the U.S. is not helping.”
“In the U.S., growth is slowing but there is no clear area of vulnerability (household and corporate balance sheets are healthy) except for elevated equity market valuations (20.5x for the S&P 500 forward PE),” Barthere said. “I can see a scenario where equity and risk assets correct enough to tighten financial conditions and trigger an economic contraction.”
“The fear of a global recession is indeed plausible given the current economic indicators and the recent actions of central banks,” said analysts at Bitfinex. “Over the past three months, central banks have executed 35 rate cuts, surpassing the rate cut levels of early 2024. This proactive easing is reminiscent of the 2009 financial crisis, which saw 76 cuts at its peak.”
Bitfinex noted several key points that are top-of-mind for investors when it comes to recession concerns.
“Despite some improvements in the inflation outlook for 2024, with global inflation expected to moderate, the economic growth projections remain tepid,” they said. “For instance, the IMF forecasts a slight decline in global growth to 2.9% in 2024, down from 3% in 2023. This slowdown in growth, coupled with persistent inflationary pressures, suggests that central banks are moving to stimulate economies to avoid further downturns.”
They also pointed to debt maturities and declining market sentiment. “The substantial amount of speculative-grade debt maturing in the US in 2024, coupled with falling bond yields, indicates a stressed financial environment,” the analyst wrote. “Investors' move to safer assets and the decline in yields are classic recession indicators, reflecting a lack of confidence in sustained economic growth.”
Another factor influencing global markets is uncertainty around the U.S. election, according to Julia Khandoshko, CEO of Mind Money.
"It was expected that the Democrats might win the election. However, the reality was different: the Fed's efforts did not bring the expected results, and Trump's victory appeared likely,” she said. “This caused investors to fear that the rate might not be lowered but, on the contrary, raised.”
“An additional factor in the panic was Japan's actions, which changed its rate for the first time since 2007, disrupting the usual stability,” Khandoshko noted. “Moreover, amid geopolitical tensions such as the conflicts over China and between Iran and Israel, markets have found themselves in a ‘perfect’ storm.”
This combination of recent events has led to uncertainty regarding the future of all assets, including stocks, which have surged to new record highs in recent weeks.
“That’s why investors wonder about the strategy: ‘If Intel has fallen, is it worth investing in other companies such as Nike, Bayer, or Carrefour?’ Khandoshko said. “However, the problem is not in specific companies but in the general shock on the market and panic of investors.”
For that reason, she said it’s important for investors to ask relevant questions to help make investment decisions, including reevaluating why they bought certain stocks, whether they still believe in the original premise that motivated them to buy those stocks, how long they plan to hold their positions, and whether or not they hedged their positions.
Khandoshko said the question of hedging “is the key for investors. Diversification is not simply about purchasing Intel or Nvidia; it is about investing in different types of assets and strategies. Investors should keep in mind the original plan and stick to it to avoid mistakes caused by panic on the market.”
As for how the crypto market will respond to the uptick in concerns about an economic recession, Bitfinex said the fear could have mixed effects on Bitcoin and the broader crypto market.
“Bitcoin might benefit as a safe haven asset,” they wrote. “During economic uncertainty, investors often flock to assets perceived as stores of value. Bitcoin, often referred to as ‘digital gold,’ could see increased demand as traditional markets face volatility.”
While BTC could see a boost, they warned that altcoins could fall as the appetite for risk decreases.
“The broader crypto market, particularly altcoins, might suffer due to decreased liquidity and risk appetite,” they said. “Investors may become more risk-averse, pulling funds from high-risk assets like smaller cryptocurrencies into safer investments.”
Gold also stands to benefit from the growing recession concerns despite the initial sell-off seen amid the market chaos on Monday.
“When markets were thrown into turmoil at the start of the week, traditional thinking would assume gold prices would soar as flighty investors search for a quick exit from the stock market,” said Neil Roarty, an analyst at Stocklytics. “Instead, gold tracked with other classes, sustaining significant losses on the way to a three-week low.”
“Could gold be losing its status as the ‘safe-haven’ asset of choice? It’s too early to draw that conclusion, and there are mitigating factors,” Roarty said.
“For one, it’s likely gold was sold off this week to cover margin calls on other assets as the market fell into freefall,” he noted. “And looking at the bigger picture, gold is still up for the year; before Monday’s tremor, the commodity surpassed the $2,500 per ounce mark for the first time ever just last week. During uncertain times, gold remains a popular choice.”
“Gold and silver got caught up in the sell-off as investors rushed to slash their exposure to all risk assets,” said David Morrison, senior market analyst at Trade Nation. “The carnage that began just under a week ago, and accelerated into Monday, triggered a cascade of selling across all financial markets – except bonds.”
“This phenomenon is often met with surprise by market participants who are so used to seeing precious metals described as ‘safe havens’ during a period of derisking,’ he noted. “But the fact is that gold and silver are both heavily traded by speculators through futures and ETFs. This leveraged ‘paper’ market is worth many times more than the actual physical one.”
“This means that gold and silver also get hit when investors/traders need to raise money quickly to cover margin calls elsewhere,” Morrison said. “So why aren’t they both shooting higher along with everything else as traders get their collective mojo back? Well, a look at the charts suggests that a recovery could soon be underway.”
“For one thing, there was no significant damage done to the bullish set-up that has been developing since earlier this year,” he noted. “This is especially true of gold where the daily chart shows a clear set of higher highs and higher lows. That’s not the case for silver. Yet a glance at the daily MACD shows a market that is very oversold. While that’s not a guarantee that prices are about to head higher, the set-up is certainly there.”
