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With central banks such as the Fed, the BOE, and the ECB widely expected to push ahead with further tightening this year, economic fears are returning to the forefront. Over the back end of last year, there was plenty of speculation of global downturn risks in the first half of this year as a result of rapidly tightening central bank policy and elevated inflation rates. While these fears died down a little over the first few months of the year as hawkish expectations fell back, they have now moved back into focus.

Still-hot inflation in the UK means the BOE has no choice but to continue with tightening. The ECB has made its commitment to further tightening very clear, while the Fed has signaled support for further rate hikes given that the economy continues to show such resilience. However, the fear now is that while the recession has been avoided so far if central banks continue to push ahead with tightening, a recession will be triggered late this year or into next year.
 

Warning From Allianz

Allianz chief economist Ludovic Subran shared his concerns with Bloomberg today warning that “One of the main risks to the economy is the risk of policy mistakes from central banks, and this toxic policy mix risk between fiscal and monetary tightening at the same time.”Subran went on to warn over lingering liquidity risks in the banking system, saying: “I stand by my call to be very cautious with the liquidity situation. I still see a lot of leverage and a lot of concern about credit risk, and to be fair a lot of financial institutions also need to continue to do the right testing. Remember, financial accidents could also come from exogenous shocks, think about climate risks.”
 

Technical Views

MSCI

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The world stocks index continues to hold atop support at the 452.09 level following a sharp plunge lower earlier this year. Sitting around midway in the range between 382.37 – 525.21, downside risks remain given that prior sell-off, with momentum studies sitting in negative territory also. 

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