European stocks are heading for a positive start to the week after losses last week, despite the US futures heading lower on the US 4th July Independence Day public holiday.
· Recession fears linger as central banks look to rein in inflation
· Eurozone PPI data is expected to show that inflation cooled slightly to 36.7% in May.
· Oil holds steady below $110 as tight supply worries match demand concerns.
Stocks fell in the previous week, and risk sentiment remains fragile on Monday. Investors remain nervous over the prospect of the central bank tightening monetary policy aggressively, causing a recession. The Fed’s Jerome Powell, BoE Governor Andrew Bailey, and ECB President Christine Lagarde all voiced a commitment to taming inflation, even if it means tipping the economy into recession. Inflation is the bigger risk in the eyes of central bankers, and a soft landing looks like a distant dream.
Inflation fears turned into recession fears last week, with investors buying back into bonds, pulling the yield of the 10-year treasury back below 3%. Meanwhile, the Nasdaq dropped 4.6%, the S&P 500 fell 2.5%, and the Dow dropped 1.4%.
In Europe, the DAX fell 2.3%, and the FTSE held up better than its European peers, falling just 0.5% after finding support from a weaker pound. GBP/USD dropped 1.4%, tumbling below 1.21 as Brexit and recession concerns cloud the BoE’s outlook for hiking rates. The weaker pound benefits the multinationals on the FTSE, owing to the favorable exchange rate on overseas earnings.
Today both the FTSE and the DAX are set to open over 1% higher.
Looking ahead
Eurozone PPI wholesale inflation and Sentix investor sentiment are expected to be the key releases in an otherwise quiet session, given that the US will remain closed for Independence.
Investor morale is expected to fall to -20 after rising by more than expected in April to 15.8 despite the dire economic tone.
PPI, which measures inflation at the factory gate level, is expected to cool slightly to 36.7% in May, down from the record high of 37.2% in April. While cooling PPI is a step in the right direction, it almost certainly won’t change the ECB’s path towards hiking interest rates last this month.
Last week, ECB’s Christine Lagarde’s hawkish comments showed her commitment to reining in inflation, with a growing possibility of outsized hikes after July. However, stalling growth means that a recession could slow the pace of monetary policy tightening, keeping EUR/USD depressed below 1.0450.
Oil
Oil prices are holding steady after gains last week, as recession fears hurting the demand outlook are matched with concerns over tight supply amid lower OPEC output, unrest in Libya, and sanctions on Russian oil.
Output from 10 OPEC members declined by 100,000 barrels per day. Declines in Libya and Nigeria were partly offset by an increase in production by Saudi Arabia. There are growing questions over OPEC’s ability to reach its newly increased output quotas.
Meanwhile, recession fears are the main downside risk for oil prices as rising interest rates and falling consumer confidence threaten to slow the global economy.
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