Morning Chronicle - Markets mostly down on recession fear, China data lends some light

The rally enjoyed across the world last week appears to have given way to nervousness about the economic outlook, while the Ukraine war continues to sow uncertainty.

The surge in inflation to multi-decade highs has forced central banks to swiftly tighten pandemic-era monetary policies, dealing a hefty blow to equities, particularly tech firms who are susceptible to higher borrowing costs.

The Federal Reserve has already sharply lifted rates and is expected to announce a second successive 75-basis-point lift next month.

There had been hope that policymakers would ease off their hikes as economies show signs of slowing, but analysts say some officials are less concerned about a recession than letting prices run out of control.

Fed boss Jerome Powell this month admitted the moves could lead to a contraction.

On Wednesday, Cleveland Fed chief Loretta Mester said she was keen to see the benchmark rate hit 3-3.5 percent this year and "a little bit above four percent next year".

"There are risks of recession," she told CNBC. "We're tightening monetary policy. My baseline forecast is for growth to be slower this year."

The threat of an extended period of elevated inflation and rate hikes has left traders weary, and markets in the red.

"With rapidly slowing US growth momentum and a Fed committed to restoring price stability, a mild recession, starting in the fourth quarter of 2022, is now most likely," Nomura's Andrew Ticehurst said.

"High US inflation appears to be a political as well as economic problem, and we don't expect the Fed to be quick to blink as risk assets wobble."

- China support hope -

Wall Street ended on a tepid note Wednesday, unable to bounce back from the previous day's plunge.

And Asia also struggled, with Hong Kong, Tokyo, Sydney, Seoul, Singapore, Taipei, Manila and Wellington all down. London, Paris and Frankfurt tumbled.

However, Shanghai ended more than one percent higher. That came after official figures showed a forecast-beating improvement in China's services sector thanks to the easing of painful Covid-19 restrictions in major cities including Shanghai and Beijing.

The non-manufacturing Purchasing Managers' Index surged to 54.7 points in June, the first time it has been above the 50-point growth mark since February.

The manufacturing gauge hit 50.2, which was also its first time in growth since February and provided some hope that the world's number two economy could be picking up after the pain caused by lockdowns.

SPI Asset Management strategist Stephen Innes added that the government and People's Bank of China could now have some room to provide growth support.

"With (consumer price) inflation low in China relative to its peers, there is plenty of scope for monetary and fiscal conditions to loosen in the second half of the year, supporting activity," he said in a note.

Crude extended Wednesday's loss as data showed demand in the United States appeared to be softening even as the driving season gets under way, and as recession fears begin to kick in.

"The higher price environment appears to be doing its job when it comes to demand," Warren Patterson, of ING Group NV, said.

The drop comes as OPEC and other major producers including Russia prepare to meet on their output agreement, with most predicting they are unlikely to open the taps further.

"I am not expecting any surprises from the group. I would imagine it will be a fairly quick meeting," Patterson said.

- Key figures at around 0810 GMT -

Tokyo - Nikkei 225: DOWN 1.5 percent at 26,393.04 (close)

Hong Kong - Hang Seng Index: DOWN 0.6 percent at 21,859.79 (close)

Shanghai - Composite: UP 1.1 percent at 3,398.62 (close)

London - FTSE 100: DOWN 1.7 percent at 7,190.99

West Texas Intermediate: DOWN 0.2 percent at $109.57 per barrel

Brent North Sea crude: DOWN 0.8 percent at $115.35 per barrel

Dollar/yen: DOWN at 136.23 yen from 136.66 yen Wednesday

Euro/dollar: UP at $1.0445 from $1.0444

Pound/dollar: UP at $1.2154 from $1.2119

Euro/pound: DOWN at 85.95 pence from 86.15 pence

New York - Dow: UP 0.3 percent at 31,029.31 (close)

A.Featherswallow--MC-UK