Markets jostled by recession fears, China optimism

NEW YORK, United States — Wall Street stocks staged a relief rally and Hong Kong soared on Thursday, but recession fears held back equity trading elsewhere.

Oil prices, meanwhile, added to recent sharp losses.

Equity markets had been rising ahead of US jobs figures last week, boosted by a surprise drop in inflation and comments from Federal Reserve boss Jerome Powell that the central bank was likely to raise rates at a slower pace soon.

But robust employment data and a jump in wages, plus figures on Monday showing a forecast-busting pickup in the US services sector last month, raised the prospect that the Fed will not back down from sharp rate increases when it meets next week.

That sent stocks slumping, with even China's relaxing of Covid testing and quarantine restrictions -- setting up the prospect of a rebound in activity in the world's second-largest economy -- unable to turn sentiment.

But following five straight declines, the S&P 500 climbed 0.8 percent.

"What we have today, then, is a little rebound spirit -- an assumption that the stock market is due for a bounce after behaving so poorly in more recent action," said market analyst Patrick O'Hare at Briefing.com.

European stocks spent the afternoon wobbling between gains and losses. Frankfurt ended the day flat, while London and Paris shed 0.2 percent.

"The risk-off sentiment... remains hard to kick into touch as concerns about recession stay front and center," noted Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

"The evil twins of recession and persistently higher inflation are lurking, keeping investors on edge."

Analysts pointed out that two-year US Treasury yields were much higher than those of 10-year bonds, which is usually considered a clear indication of a looming downturn.

This week also saw the heads of some of Wall Street's biggest banks warn of a slowdown.

China Covid shift

The fear of a US recession is playing off against China's shift away from its zero-Covid strategy of snap lockdowns and mass testing.

After widespread protests last month against the strict measures and calls for more political freedoms, authorities have scaled back many rules and on Wednesday announced a nationwide loosening of restrictions.

While there are worries that the more liberal approach will spark a surge in infections, it has helped fan a rally in Hong Kong where Chinese tech firms and property developers are listed.

The Hang Seng Index closed up more than three percent Thursday.

"Developments in China have a big role to play, although as we're seeing once again, Covid-related moves are almost exclusively impacting stocks in domestic markets," said Craig Erlam, senior analyst at OANDA trading group. 

Joshua Mahony, senior market analyst at online trading platform IG, added that "to a large extent this week highlights how traders have to somehow weigh up the benefits of a gradual Chinese reopening with the fears of an impending economic contraction in the year ahead."