Concerns over new covid restrictions in China, as well as surging natural gas prices have weighed on European markets today. These fears over an extended economic slump in China have also weighed on copper and oil prices.
Authorities in China have imposed further covid restrictions, which could affect up to 30m people in the days ahead, as 7-day restrictions were announced for Macau. With infections rising again in Shanghai, fears are growing that growth prospects for Q3 are unlikely to be V-shaped in nature, with this week’s Q2 GDP numbers expected to be ugly.
An initial jump in natural gas prices initially weighed on sentiment, although prices have since fallen back even as a planned maintenance shutdown on the main Nord Stream 1 pipeline, starts today, prompting concerns that it might not reopen, or at least be used as an excuse for Russia to further weaponize gas flows heading into the winter months.
Not unexpectedly the DAX has led in terms of the losses, given the effects higher energy prices could have on its manufacturing base heading into the second half of the year.
Airlines are also getting clobbered after Heathrow Airport warned of worse flight disruption to come and Wizz Air became the latest in the sector to cut back its flight timetable over the summer. With reports of overcrowding, lost baggage and delays becoming more commonplace the attractions of going abroad don’t look likely to improve anytime soon, with IAG, easyJet and Ryanair all lower.
This will likely act as a huge deterrent on future bookings over the rest of the year. Most people go on holiday to relax, and flying at the moment seems anything but, with packed departure lounges, delays and the risk of lost luggage. The better option is likely to be to stay at home, even with the higher costs that might involve, which could be good news for holiday destinations here in the UK.
The FTSE100 has outperformed largely due to the more defensive areas of the index of utilities and health care.
SSE, Centrica and National Grid also received good news today when it was reported that the UK government was not planning to extend the windfall tax to electricity or infrastructure companies, giving the wider sector a welcome boost.
Also doing well Harbour Energy has reported good news from its Indonesian Timpan exploration well, in which it reported a 390-foot gas column, with the prospect that it could be commercially profitable with the right amount of investment.
US markets have followed markets in Europe lower, with the main focus this week on the latest US CPI report, which is expected to see headline CPI reach a new 40 year high, close to 9%.
On the downside Twitter shares are back in focus, opening sharply lower after Friday’s reports that Elon Musk is pulling the plug on the $44bn deal for the social media company. With Twitter set to bring legal action against Musk, the stage appears to be being set for a messy legal battle with Musk saying that Twitter needs to be more transparent with its user data and that its assessment that only 5% of its total users are bots is a massive underestimation.
Casino operators exposed to China are under pressure after authorities in Macau were closed all businesses there for a week due to a Covid outbreak with Wynn Resorts and Las Vegas Sands one of the biggest decliners.
The US dollar is back on the front foot today against a backdrop of rising concern over the global growth outlook as China imposes new covid restrictions, and European gas prices jump sharply. The US dollar index has pushed beyond last week’s high and to its highest level since October 2002, as safe haven demand continues to drive it higher.
This US dollar strength has seen the euro push to new 19-year lows, taking out Friday’s previous dip and nearer to parity against the greenback. A move through parity has the potential to open up a move that could see further losses towards the 0.9680 level, which was the lows in October 2002. In the current environment amidst concerns over rising energy prices and a hamstrung ECB when it comes to rate rises, further declines seem almost a matter of when and not if.
The Australian dollar is also getting hit hard on the back of the weaker China narrative, sliding to a two-year low and breaking below 0.6755 which had acted as support over the past week and which was a 50% pullback from the 0.5505 lows in March 2020, and the peaks last year at 0.8005. Today’s break below 0.6750 opens up the prospect of a stronger move towards 0.6465.
The pound is also looking vulnerable to further losses towards 1.1500 in the face of the surging US dollar, although on the CMC GBP Index it is still above its lows for this year, though this is cold comfort at a time when a weak currency exacerbates concerns about higher imported prices
At the end of last week copper prices got a decent lift on reports that China might bring forward $220bn of stimulus from next year into the second half of this year. While on the face of it this seems a positive move it's unlikely to be as effective if China keeps imposing stop-start covid restrictions on its economy every time we get reports of new cases. Copper prices are lower again today over concerns that we could see the pattern of Q2, replicated in Q3, after China imposed 7-day restrictions across a number of regions.
Oil prices are also lower for the very same reason as concerns about an H2 rebound start to get tempered with China showing little signs of resiling from its zero-covid strategy.
The strong US dollar is also weighing on gold prices with the entire precious metals sector finding itself weighed down by a weakening economic outlook.
Despite those impending concerns over Russia’s progress in Ukraine and the mounting global recession risk, the latter part of the week saw a strong finish for a number of European car makers and banks. That was evidently driven by a combination of factors ranging from fundamental excitement over progress with electric vehicles to the other extreme of bargain hunting after Italy’s bank-heavy MIB index bounced off lows not seen since November 2020. By Friday, daily vol on CMC’s proprietary basket of European car manufacturing stocks sat at 65% on the day versus 52% on the month, whilst on Thursday the Euro banks basket traded at 61% on the day versus 47% on the month.
Lumber has been consistent in dominating the commodities class in recent days, with the underlying price advancing $100 – or around 15% - over the course of the week, before some of these gains were marked back ahead of the close. It does seem to be a case that the market here is simply struggling to find fair value, following that 65% sell off between February and June. The fundamentals certainly seem rough for this market which has been propelled by rampant demand from homeowners borrowing money at little cost and supply chain disruption – both of which now seem to be fading fast. On Thursday, daily vol say at 213% against 145% for the month.
In the latter part of the week, the Hungarian Forint was very much in the spotlight, with the market’s muted reaction to the country’s central bank hiking interest rates by 2% being notable. USD/HUF did reverse from all-time highs, but the shift was limited and the question many will be asking is whether the Forint bears will be lining up for another go at the currency in the coming days. By Thursday, daily vol on the Forint pair sat at 31.54% against 19.68% on the month.