Investors have piled out of European stocks this week, accelerating a decline that began at the end of last month, and has accelerated over the last two days.
Europe
This morning’s reckless shelling of a Ukrainian nuclear power plant by Russian forces, shows that Putin is becoming increasingly desperate to obtain a victory in the face of numerous setbacks, and with little sign that he is inclined to back down. If anything, the stubbornness of Ukrainian forces is enraging him further, in turn raising the uncertainty level further.
These actions are a significant escalation and raise the question as to whether Putin could adopt a scorched earth policy in his attempts to crush Ukrainian resistance.
Fears of further escalations, on top of rising inflationary risks putting pressure on European companies’ margins, as well as future profits, and has seen the DAX slide to its lowest levels since December 2020.
The FTSE100 has also had a shocker of a week, posting its largest decline since March 2020, and below the 7,000 level to its lowest point since August last year. In terms of weekly performance, the best performers have been in defence, and commodities with weekly gains for BAE Systems, and the likes of Glencore, Rio Tinto and Antofagasta.
Today’s selloff has been broad based with travel and leisure getting hit hard as surging oil prices push up fuel costs for the airlines, as well as eroding consumers disposable incomes. While some airlines are partially hedged for rising fuel prices none of them are fully hedged. Eastern European based Wizz Air is once again on the receiving end of the heaviest losses.
European banks are getting clobbered over concerns about the economic outlook for the European economy, rising inflation risk, and an ECB likely to remain behind the curve when it comes to raising rates. Amongst the worst performers French bank Société Générale is down over 25% this week, as is Italy’s UniCredit, while Deutsche Bank is down over 20%.
UK banks have also been hit but their weekly losses have been more modest with Barclays down over 15% this week, the worst performer.
ITV has also continued to get clobbered, falling further on the back of a broker downgrade as investors reacted to yesterday’s full year numbers, which spooked shareholders with respect to the rising costs of their streaming services. The investment in a new streaming service ITVX, points to a disjointed approach given its investment into BritBox as well as ITV Hub, with the shares down over 30% on the week.
US
Despite a decent jobs report, US markets opened lower, are also finishing the week on a negative note. February’s jobs report saw 678k jobs added, and the unemployment rate fall to 3.8%. What was even more encouraging was the participation rate rose to 62.3% up from 62.2%, however the wages numbers were disappointing, as average hourly earnings slid back sharply from 5.5% in January to 5.1%.
US markets have largely outperformed this week, as markets in Europe get clobbered, with the thought that perhaps on a geographical level they might be becoming a safer haven. The energy sector has seen some decent gains with Chevron and Occidental outperforming over the past few days, although travel and leisure has had a bad week with big losses for United Airlines, Royal Caribbean, Carnival, and Delta Airlines, posting losses in excess of 15% on the week.
FX
The euro has slipped below the 1.1000 level for the first time since May 2020, after this morning’s Russian attack on a nuclear power plant inside Ukraine. The single currency is also getting hurt on growing risks to the European economy and the expectation that the US Federal Reserve will be able to raise rates much quicker than the European Central Bank. The ECB is set to meet next week and will have to wrestle with the challenges of an economy that is about to be hit by the twin headwinds of even higher prices, which in turn is likely to push the continent into recession.
The US dollar has continued to edge higher after a decent US payrolls report, helped largely by the weakness in the euro, which has also slipped to its lowest levels against the pound since before the Brexit referendum.
One of the best performers this week has been the Australian dollar, with the currency getting the benefit from the surge in commodity prices, due to its large mining sector.
Commodities
The global inflation shock has gained momentum this week with wheat prices rising to a 14-year high, corn prices to an 8-year high, and Brent crude prices hitting 10-year highs of $120 a barrel.
The rise in Brent crude, while driven by sanctions on Russia, has also been exacerbated by the shutdown of a key Libyan oil field after protestors closed it down. This morning’s escalation by Russia in shelling a nuclear power station hasn’t helped either, as it becomes increasingly apparent that Russia is adopting a scorched earth policy in Ukraine.
The rise in agricultural commodity prices is particularly worrying given that the last time they were at these sorts of levels, we had the Arab Spring in 2012.
Volatility
Starting with single stock CFDs, ITV was something of a stand-out in terms of volatility yesterday, at least when looking beyond the Russia Ukraine conflict. Results from the media company showed a good rebound post pandemic but the market is evidently concerned as to the costs of generating new content, toppling more than a quarter off the underlying price and driving daily vol to 205%, up from a monthly figure of 78%.
European equity markets struggled across the board yesterday and although it was far from the biggest faller, the Poland 20 saw a notable uptick in volatility. Caution is set to remain high across the continent amidst concerns over energy prices as well as broader security fears. One day vol on the WIG sat at 72%, up from a monthly print of 56%.
Energies remain toppy and UK Low Sulphur Gas Oil surged to fresh highs yesterday, eclipsing levels seen seven years ago. However, the market here did run out of steam with speculators presumably booking profits. The underlying was up 30% on the week, but has retreated around 10% from the peak, leaving one day vol at 113% against a one month reading of 53%.
Rounding off with forex, beyond Dollar Rouble it’s those Eastern European currencies which remain elevated. They’re seen as being correlated to a degree with the Russian economy – at least as it was – whilst there’s also talk of central bank intervention in a bid to provide some stability. That in itself could be seen as a fresh opportunity but the Dollar Forint vol sat at 27% against 18% whilst Dollar Zloty saw 27% against 19%.
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