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European stocks shrug off weak PMIs

Trader looking at screens


European markets appear to be shrugging off concerns over an economic slowdown after the latest flash PMIs showed that economic activity in France and Germany slowed markedly, indicating that the area was at risk of sliding into recessionary territory.


This week’s stock market gains appear to be being driven by a calculation that the deteriorating economic outlook may give central bankers pause when it comes to raising rates as aggressively as originally priced. The weakness in commodity prices is certainly helping investors draw this conclusion, however it still seems a remarkably premature conclusion, even as German 10-year yields hit their lowest levels since May.

Nonetheless we’ve seen a decent week of gains, with the DAX and FTSE100 set to close at 5-week highs.     

The slide in yields is manifesting itself into underperformance in banks with Standard Chartered, HSBC, NatWest Group and Lloyds all slightly lower.

BT Group shares are also lower, as the Competition and Markets Authority approves its joint venture with Warner Bros Discovery of BT Sport and Eurosport UK.

JD Sports is also lower despite a reasonably positive trading update, for the five months year to date, total sales are 5% ahead of last year. The board also reiterated that headline profit before tax would be in line with last year.


US markets look set to end a solidly positive week in a mixed fashion as investors mull disappointing earnings announcements and what appears to be a softening in the US economy. With the Federal Reserve due to meet next week and raise rates by 75bps the question being asked is how many more rate hikes are likely against a softening global economy.

This weakness is being reflected in a slide in US bond yields, as markets try and price whether we’re heading for a recession, and/or a reversal in the rate hiking cycle?  

Snap has acted as the canary in the coal mine before when it comes to being a leading indicator for what might be coming as far as slowdowns in advertising sales, so yesterday’s miss on Q2 revenues on the back of weaker advertising and sales revenues, bodes ill for Alphabet and Meta Platforms next week, when they release their Q2 numbers.

The disappointment over the numbers from Snap has seen the shares open sharply lower after revenues came in at $1.11bn, which while still a decent increase of 13% was below expectations of $1.14bn. Losses came in higher than expected at $442m, with the company also declining to offer specific guidance for Q3, other than to say that revenues were expected to be flat.

Even without the sideshow that is Elon Musk’s on-off pursuit of Twitter, today’s Q2 numbers were of enormous interest given last night's miss from Snap on ad revenues.

It’s been a similar picture with total revenues falling short at $1.18bn, missing expectations of $1.32bn, while ad revenue came in at $1.08bn, well below expectations of $1.23bn. Costs and expenses were also higher as losses increased to $0.35c a share, with the shares opening lower. Consequently, we’ve seen weakness in the likes of Alphabet, Meta Platforms and Pinterest all of whom report in the next ten days.


The pound was initially weaker against the US dollar after UK retail sales painted a mixed picture for June, with a decline in fuel sales of 4.3%, prompting a month on month decline of -0.1%, following on from a revised -0.8% fall in May. With fuel sales stripped out we did see a rebound of 0.4%, which was helped by a sizable 3.1% rise in food sales.

The consumer outlook continues to look challenging with consumer confidence stuck at a record low of -41, with the only silver lining to today’s numbers was that consumers seemed determined to enjoy the 4-day Platinum Jubilee holiday weekend, given the sharp rebound in food and drink sales.

Despite yesterday’s 50bps rate hike by the ECB, the euro initially struggled, sliding back after the latest flash PMIs for July showed the German composite PMI slipped into contraction territory for the first time since the end of last year, and its lowest level in two years on the composite level. Concerns over a shutoff of energy supplies heading into the autumn is clearly weighing on business confidence and planning. We’ve seen a sharp fall in bond yields because of this weakness, as markets price out the possibility of an upcoming recession.

Having spent most of the day on the front foot, the US dollar also slipped to its lowest levels of the day and the week, after flash services PMI for July slid sharply into contraction territory, and to a two year low of 47, from 52.7 in June. This unexpected decline as we head into next week's Fed meeting is likely to be food for thought for US policymakers as they get set to hike rates by 75bps. As with the ECB questions are now being asked as to whether the Federal Reserve will be able to be anywhere near as aggressive as they were suggesting a few weeks ago when June CPI hit 9.1%.  


Crude oil prices look set to post their first positive week since early June, helped in no small part by a weaker US dollar. The rebound appears a little tepid given that it's coming against a backdrop of weakening demand, and concerns over a deterioration in the wider economic outlook.

Gold prices have seen a decent rebound in the last couple of days as a weaker US dollar and lower yields pull the yellow metal off 18-month lows.


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