Asia stocks drop, euro stuck at 20-year low on recession

Equities mostly fell in Asia on Wednesday and the euro wallowed at a 20-year low as recession fears flowed through markets, while political uncertainty hit the pound as UK Prime Minister Boris Johnson suffered a series of resignations.

Adding to the uncertainty was a fresh flare-up of coronavirus cases in parts of China that has seen some cities locked down as part of officials' zero-Covid policy, reviving bad memories about strict measures in Shanghai and Beijing earlier this year that hammered the economy.

Investors are growing increasingly concerned that sharp central bank interest rate hikes aimed at fighting decades-high inflation will lead to a contraction in leading economies, while a worsening energy crisis is compounding the problem in Europe.

While there was a little help from speculation that US President Joe Biden was considering removing some Trump-era tariffs on Chinese goods, equities struggled.

Hong Kong, Tokyo, Shanghai, Sydney, Seoul, Taipei and Jakarta all sank, though Wellington, Bangkok, Manila and Mumbai saw gains.

London, Paris and Frankfurt rose after suffering hefty losses Tuesday.

Investors were racing "to price in both a US recession... and also the potential for wider virus restrictions in China following overnight developments", OANDA's Jeffrey Halley said.

"The prospect of more covid zero restrictions in China is an unwelcome dose of reality for Asia and is certainly carrying more weight, although Asian currency weakness is also in play," he said in a note.

Both main crude contracts edged up after being pummelled Tuesday, when WTI sank nearly nine percent below $100 a barrel for the first time since April and Brent shed around 10 percent.

Those losses came on expectations that any recession will slam demand, despite tight supplies caused by Russia's war in Ukraine.

And Citigroup said in a note that a recession could lead prices to drop as low as $65 this year if OPEC and other major producers do not step in to provide support and companies do not invest.

There are also signs that the high cost of fuel is hurting demand, in turn pushing prices down. Earlier this week, the head of Asia at crude trading giant Vitol said he saw signs consumers were beginning to feel the pressure of high prices -- a phenomenon known as demand destruction.

Still, Goldman Sachs said it thought the commodity would remain elevated.

"While the odds of a recession are indeed rising, it is premature for the oil market to be succumbing to such concerns," the bank's analysts including Damien Courvalin said in a note.

"The global economy is still growing, with the rise in oil demand this year set to significantly outperform GDP growth."

Commentators said falling oil prices and the prospect of a recession could give central banks room to ease up on their monetary tightening campaigns, which could provide some relief to equities.

US Treasury yields, a proxy for interest rates and a go-to in times of uncertainty, have tumbled on the prospect of a contraction in recent days.

"Markets are saying recession is coming, inflation will slow down, commodities will fall and the Fed will cut rates in 2023," said Gang Hu, at Winshore Capital Partners.

He said it was hard to go against the view "because this storyline is consistent. It can be a self-fulfilling process".

The euro remained stuck at 2002 lows and appeared to be heading towards parity with the dollar after hitting a 20-year low owing to the European Central Bank's decision not to lift interest rates until this month, lagging the Fed's fast pace of hikes that have sent the dollar soaring.

The continent also faces an energy crisis caused by sanctions on Russian fuel over its invasion of Ukraine.

"The euro has depreciated sharply due to a toxic cocktail of negative drivers," said SPI Asset Management's Stephen Innes.

"An oddly hesitant ECB contrasts with a more aggressive Fed, worries about natural gas supply disruption and economic recession are deepening."

And he warned further falls could be on the way for the single currency.

"We have unlikely reached maximum uncertainty and total negativity, which opens the door to a test below sub-parity. So with the euro-dollar in the mid-1.02s, it might not be too late to punch your ticket for a ride on the parity party bandwagon."

The pound briefly fell to a two-year low of $1.1899 after Johnson's finance chief and interior minister both resigned -- followed by several aides -- saying they could no longer tolerate the culture of scandal that has stalked Number 10 for several months.

The news got worse Wednesday with news that two more ministers had stepped down, leaving Johnson fighting for his political life.