Europe heads lower after Russian oil ban agreed – Daily Market Brief, May 31, 2022

European markets are pointing to a modestly weaker start amid concerns over inflation, Chinese data, and after the EU finally approved a ban on Russian oil.

·         China PMIs show that the manufacturing and service sector activity contracted again in May

·         The EU finally approves the ban on Russian oil imports sending oil prices to a 2-month high

·         Eurozone inflation is expected to rise to a record 7.7% YoY in May

European markets closed higher at the start of the week, boosted by optimism surrounding the reopening of China as COVID restrictions eased. Shanghai is expected to fully reopen tomorrow from the two-month lockdown, which hit the economy hard.

China PMI data for May showed that both the manufacturing and the service sector contracted again in May. The manufacturing PMI was 47.8, up from 41.9 in April, but below forecasts of 50.7. While the services PMI was 49.6, in line with expectations and up from 47.4. The figure 50 separates expansion from contraction.

The data shows that the picture is improving, and the peak growth shock has passed. However, the road to recovery is slow. Asian stocks traded mixed following the data, and the AUD slipped modestly lower from 5-week highs.

Oil

The EU has finally approved a plan to ban 90% of Russian oil imports by the end of the year, resolving a deadlock with Hungary, which had been holding the agreement up. The deal has fueled fears of a tighter oil market at a time when the demand outlook is also improving as China reopens and as peak driving season in the US kicks off.

WTI crude rose to $118.30 following the announcement, a two-month high since the prospect of additional supply looks elusive. OPEC+ is due to meet on Thursday to discuss output quotas for July. The oil cartel is not expected to deviate from the previously agreed 432k bpd additional supply.

Inflation

Rising oil prices mean that inflation, which is already at record levels in Europe, will likely continue to rise. Eurozone inflation data is due today and is expected to rise to 7.7% YoY in May, up from 7.4% in April. Given the hotter than expected inflation recorded in Germany yesterday at 7.9% and in Spain at 8.7%, plus surging PPI numbers, there is a good chance that today’s eurozone inflation reading will be hotter than expected.

The reading comes as ECB policymakers, including President Christine Lagarde, adopted a more hawkish stance toward monetary policy last week. The central bank indicated that it is now considering raising interest rates several times across the summer months starting in July to tame record inflation.

Looking ahead

Looking out towards the US session, traders will be returning to their desks after solid gains in stocks last week and after the Memorial Day public holiday.

US consumer confidence data will be in focus and is expected to fall to 103.9 in May, down from 107.3 in April.

US indices point to a weaker start while the safe-haven USD rises after steep falls last week.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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