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European markets on course for worst week since March as flash PMIs sink

The last few days have seen a significant shift in mood when it comes to the outlook for the global economy, with rising bond yields driven by more hawkish central banks, prompting investors to reassess the outlook when it comes to valuations and growth.


European markets have seen another negative session, closing lower every day this week as concerns over a more aggressive central bank posture, and rising core inflation have prompted a reassessment of central banks' tightening intentions. Up until last week, markets had been operating under the premise that rate hikes were coming to an end, however Powell’s press conference, along with a more hawkish narrative from the European Central Bank last week, and this week’s bigger-than-expected rate hikes from the Bank of England and Norges Bank, suggests higher rates are likely to be with us for a long time. Consequently, markets are now repricing for just such a scenario, where growth is likely to slow considerably as recession risks increase. 

The DAX has fallen sharply with Siemens Energy falling over 30% after the company pulled its full-year guidance due to problems in its Spanish Gamesa operation. The FTSE 100 has also come under pressure, sliding below 7,500, and moving back to levels it was trading at the start of this year.

The worst of the losses have been tempered somewhat by GSK, whose shares have received a welcome boost after announcing that it had reached a confidential no-fault settlement with one of the plaintiffs in the US over its Zantac drug. These claims, that the drug has caused cancer in a number of cases, have acted as a cloud over the company in recent months, with today’s announcement being greeted by investors as a possible precedent for the remainder of the claims. 

The biggest fallers have been in basic resources and banks, with lower copper and oil prices weighing on the likes of Glencore, Shell and Rio Tinto. The banks are lower, albeit off the lows of the day, as HSBC, Barclays and Lloyds along with other lenders agreed with the UK government on increased flexibility to mortgage holders when it comes to moving to longer term, or interest-only payment schedules, along with flexibility to switch back, and an agreement to a minimum 12-month period before repossession. 

All these measures seem eminently sensible, as it's not really in UK banks' interest to be trigger-happy when it comes to struggling customers, and the effect of higher mortgage payments, so I'm not really sure why the government needed to get involved, other than for the case of optics, so they could take credit for keeping the banks in line. 

The travel and leisure sector is getting hit over concerns that higher interest costs will hit disposable incomes and prompt a retrenchment in holiday and discretionary spend, with the likes of British Airways owner IAG sharply lower, along with the budget sector of easyJet, TUI, Jet2 and Ryanair.

Ocado shares, which have enjoyed a strong two-day boost on speculation that Amazon might be interested in making a bid, have slipped back sharply, with neither company making any comment on the speculation, prompting a loss of momentum as the hype subsides.   


US markets managed to close well off their lows of the day yesterday, with the S&P 500 managing to eke out some small gains, however today’s open has seen stocks come under pressure as the weakness seen in Asia and Europe has spilled over, after Japanese core inflation numbers surprised to the upside, and PMIs in Europe fell back more than expected.

US manufacturing and services PMIs for June was mixed with manufacturing slipping to 46.3, while services slowed from 54.9 to 54.1.  

The Nasdaq 100 appears to be leading the losses today, helping to drag US markets to potentially post their worst weekly performance since March, while US bond yields are also falling as markets start to fret about the prospect of an upcoming recession.

Stocks in focus include Virgin Galactic after the company used the recent jump in the share price to sell $400m in new shares as it looks to boost its cash flow.

Tesla shares managed to rebound yesterday, having been on the receiving end of a number of broker downgrades earlier this week. Today the shares have slipped back again, along with the shares of Nikola as investors worry that the recent rally has run its course.    


The US dollar has been the big winner after today’s disappointing flash PMI numbers from France and Germany, which has seen the euro fall sharply. Only yesterday we were sitting above 1.1000 and today have slipped sharply to one-week lows below 1.0850.  

The commodity currencies have taken the biggest hits with the Norwegian krone and Australian dollar seeing heavy falls, due to increased concerns over falling demand for oil and copper, with the prices for both falling back sharply.

UK 2-year gilt yields after initially dipping below 5% in early trade in the wake of some disappointing PMI numbers have rebounded sharply, pushing up to new 15-year highs above 5.13%, as markets continued to price in further rate hikes from the Bank of England. Market pricing today has seen traders looking to price in a terminal of 6.25%, which seems excessive given where we are now. While many have suggested that the Bank of England has panicked, they have merely pushed rates to where they should have been a few months ago.

Looking at today’s economic data the UK economy still remains quite resilient, but this resilience is wafer thin, and it's not in the Bank of England’s or anyone’s interest to push rates to those sorts of rarefied levels. That said, bond markets are increasingly pricing a UK recession as UK 2-year yields rise to their highest levels since 2008, while 10-year yields have fallen to 10-day lows. 

It is true core inflation is well above target, but crushing the economy is not the way to reduce it. Given that is happening with PPI price rises that are slowing, rates may need to stay higher for longer, perhaps for two to three years. The only way inflation might fall to 2% quickly is if demand craters, and I’m not sure central banks will want to see that.


As if to reinforce market fears over an upcoming recession, crude oil prices have continued to fall after the steep declines of yesterday, slipping to one-week lows after this morning’s poor flash PMIs from Europe.

Gold prices are seeing a modest rebound today but are still on course for their biggest weekly fall since February having hit three-month lows yesterday. With short term yields still looking firm, and the US dollar seeing another strong session, the line of least resistance appears to be for further losses towards $1,900 an ounce.


Tesla started Thursday’s trade on the back foot following a downgrade by analysts, but losses proved to be short-lived, leaving the stock to advance by more than 6% from its opening lows. One day volatility stood at 107.38% against 77.9% on the month.

CMC’s proprietary basket of licensed marijuana growers saw elevated levels of price action yesterday, with heavyweight Aurora Cannabis seeing its recent run of gains extended. The stock had been languishing around lows not seen in almost a decade but the underlying has rallied around 15% over the last week. One day vol printed 92.47% against 62.58% for the month.

Cryptos remain active with Bitcoin Cash the real outlier here following its rapid ascent earlier in the week. Prices hit a four-month high in the early hours of Thursday morning before retreating. One day vol came in at 149.31% against 55.66% for the month.

Demand concerns for the oil market proved sufficient to leave energy prices looking somewhat turbulent. US heating oil was the big outlier, as it quickly reversed all of Wednesday’s gains during yesterday’s session. One day vol printed 38.17% against 30.91% for the month.

And in currencies, sterling has been the most active following the Bank of England’s roll of the dice yesterday with a bumper 50 basis point rate hike as it continues to try and get inflation under control. One day vol on EUR/GBP sat at 7.64% against a monthly reading of 5.19%.

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