Stock markets were mixed on Monday with European shares drifting lower on rising recession concerns, while Asian equities followed Wall Street higher after last week’s rally fueled by hopes for less aggressive Fed rate hikes.

In the U.S., futures pointed to a muted open after the major indexes logged their strongest weekly gains since late 2022. Investors were parsing fresh economic data and earnings, while also eyeing speeches from multiple Federal Reserve officials this week.

Meanwhile, oil prices climbed over $1 a barrel as Saudi Arabia and Russia reiterated their commitment to oil production cuts. However, worries about slowing demand due to global growth fears kept a lid on crude’s gains.

Let’s analyze the key factors driving Monday’s market action:

Europe Slips on Growth Worries, U.S. Futures Inch Higher
European shares treaded water on Monday after recent surveys of factory activity suggested deteriorating business conditions amid tightening financial conditions.

The pan-European STOXX 600 index was nearly flat after Germany’s DAX slipped 0.1% and France’s CAC 40 edged down 0.2%. Britain’s FTSE 100 also hovered just below the unchanged line.

Fresh data showed euro zone business activity contracted for a third straight month in October, stoking fears that a recession may be underway.

S&P 500 futures rose 0.1% early Monday, along with a slight gain in Dow futures. The major U.S. stock indexes are coming off their best weekly performance since late 2022 after a soft jobs report eased worries about aggressive Fed rate hikes.

However, equity markets remain vulnerable to recession risks as central banks combat stubborn inflation by keeping monetary policy restrictive. Any renewed signs of economic slowdown could further pressure stocks.

Upbeat Asia Follows U.S. Gains, China Stocks Surge

Asian markets kicked off the trading week on a strong note as last week’s epic U.S. stock rally lifted sentiment. Investors were hopeful that signs of economic softening could lead the Fed to temper rate hikes.

Japan’s Nikkei jumped 2.4% and South Korea’s Kospi surged 5.7%, its largest daily percentage gain since March 2020. Markets in these export-heavy economies tend to benefit from a weaker U.S. dollar, which has softened recently.

However, Japanese service sector activity expanded at the slowest pace this year in October amid weak demand, a worrying sign for a key growth driver.

Stocks in mainland China rallied, with the Shanghai Composite gaining 0.9%, as investors hoped for an eventual reopening of the economy after strict COVID curbs. Hong Kong’s Hang Seng Index climbed 1.7%.

With the Fed potentially approaching the end of its rate hike cycle, investors grew more confident of a rebound in Chinese markets that were hammered earlier this year.

Saudi Arabia, Russia Commit to Oil Cuts

In the commodities sector, oil prices climbed as Saudi Arabia and Russia reiterated their commitment to supply cuts ahead of the next OPEC+ meeting.

Prices fell in recent months on worries about weakening global demand, but received a boost after the alliance of oil producers announced reductions of more than 1 million barrels per day starting November until the end of 2023.

U.S. West Texas Intermediate crude rose 1.4% to $81.94 per barrel, while international benchmark Brent crude added 1.3% to $86.10.

The oil producers’ pledge to maintain output cuts helped stabilize prices following their steep drop from over $120 in June to around $75 in recent weeks. But headwinds persist from the strong dollar and China’s COVID-related slowdown hampering consumption.

Earnings Season Winds Down After Solid Results

The third-quarter earnings season is wrapping up after providing a mixed but fairly resilient picture of corporate health amid high inflation and rising interest rates.

With over 400 S&P 500 companies having reported, overall earnings growth is set to decline year-over-year. However, nearly 70% have topped analyst estimates, according to Refinitiv data.

Major banks, large retailers, technology firms, and industrial companies have cited still-solid demand trends even as consumer and business spending show some signs of slowing.

Looking ahead, the fourth quarter could prove more challenging as the lagging effects of Fed rate hikes become more apparent. But the labor market remains tight for now, supporting incomes and spending.

Notable reporters this week include Occidental Petroleum, DR Horton, Walt Disney, and Wynn Resorts. Their results should provide clues into the health of the consumer.

Fed Speeches May Shed Light on Rate Path

Investors are gearing up for public appearances from multiple Federal Reserve officials this week, headlined by Chair Jerome Powell on Wednesday.

Speeches from Fed regional presidents and governors could offer insights into how officials are evaluating recent economic data and what it means for the path of future rate hikes.

Markets are currently pricing in a downshift to a 50 basis point rate increase at the Fed’s December meeting, compared to 75 in the past four. But there are differing views within the central bank on how long restrictive policy should be maintained.

If officials point to still-stubborn inflation and the need to keep rates higher for longer, it could dampen hopes for an imminent policy pivot. On the other hand, dovish signals could boost stocks and weigh on bond yields.

Uncertainties Persist Despite Rally

Looking at the bigger picture, the major stock indexes remain mired deeply in bear markets despite surging over 5% last week. High inflation, geopolitical turmoil, and central bank tightening still pose significant headwinds to markets.

While investors grew more optimistic that the Fed may be nearing the end of its rate hike cycle, policy is likely to stay restrictive for some time as officials try to ensure price stability. Rising borrowing costs could easily tip major economies into recessions throughout 2023.

Moreover, corporate earnings face challenges from surging labor costs and weaker demand. And if inflation proves difficult to tame, the Fed may need to take rates higher than markets currently expect.

In these uncertain times, having a long-term perspective and utilization prudent risk management will be critical. While stocks look poised to build on October’s sharp rally in the near term, significant risks remain that could trigger renewed volatility.