Despite the great pressure on the economy, investment markets continued the rally in early August. Later in the month, equities followed global markets and retreated over recessionary and monetary tightening fears. Over the month of August, the European STOXX 600 index lost 5.29% (6.61% in US$ terms).

Recessionary fears further increased over the month, the energy crisis being one of the biggest worries in the market. Gas supplies through the Nord Stream 1 has once again been suspended at the end of August, the shortfall in the gas supply could potentially result in larger contractions in the economy due to energy rationing in winter months. The shortage is further amplified by the dry weather, which has affected hydropower generation, further burdening the grid when gas is already in short supply. The drought also affected key waterways in the region, hampering power generation and industrial activities along the rivers, exacerbating the already weak economy.

The other glaring issue is the elevated inflation, with the latest CPI hitting another record high of 9.1% YoY, the figure was further amplified by the weakness of the Euro. Monetary policy will stay restrictive for longer, as ECB President Christine Lagarde has suggested. Investment markets will bear the brunt of the tightening as valuation levels compress; while the economy faces more pressure arising from inflation and a weak sentiment. With no change in the existing trends, recession risks have further increased, we would advise against investing in the market before recession is fully priced in.