World Markets

European and UK stock markets are expected to open sharply lower today, as investors fret over the economic risks facing the region, including geopolitical developments, further energy shortages, and slowing growth coupled with soaring inflation.

In fact, the escalating energy row between Moscow and the West is set to occupy investors’ attention in the week ahead after Moscow vowed to keep its main gas pipeline to Germany shut. Nonetheless, UK political development will most likely be under the spotlight in the first half of the week as Monday and Tuesday will see the announcement and appointment of the UK’s new prime minister. Additionally, the European Central Bank and Christine Lagarde are set to deliver a big rate hike on Thursday whereas Federal Reserve Chair Jerome Powell is due to make an appearance before the central bank goes into its blackout period before its next meeting at the end of the month.

GBP
The UK prepares for an important day today as the Conservative Party will unveil their new leader, with Liz Truss being the overwhelming favourite. Whereas tomorrow, Tuesday 6th September, the new PM will officially take office after being appointed by the Queen to succeed Boris Johnson. Their roadmap to the UK’s current economic headwinds will be key: extra support for businesses and households will be of utmost importance with Brexit issues also expected to return to the forefront if Truss wins. Nonetheless, Ahead of the Tory party’s leadership announcement, there will be some financial news releases. In fact, investors will be looking for more meat on the bone in terms of commentary on current trading and the outlook for the rest of 2022. UK services sector PMI data will be of interest, mid-morning, but may be drowned out by the headlines from Westminster.

EUR
The Euro seems set for a very volatile and turbulent week losing ground in early trading hours this morning. The standoff over Russian gas and oil exports escalated Friday after Moscow vowed to keep its main gas supply pipeline to Germany shuttered. The latest Nord Stream pipeline shutdown, which Russia says will last for as long as it takes to carry out repairs, added to fears of winter gas shortages that could pull major economies into recession and lead to energy rationing. The latest development has seen the euro fall below 99 cents to the dollar for the first time in over two decades. Europe has accused Russia of weaponizing energy supplies in what Moscow has called an “economic war”. Nonetheless, Moscow blames Western sanctions and technical issues for supply disruptions. Ultimately, the European Commission has warned that a full cut-off of Russian gas supplies to Europe, if combined with a cold winter, could reduce GDP across the European Union by as much as 1.5% if countries did not prepare in advance.

USD
Concluding last week’s stretch of US economic data was the release of the monthly employment report: Non-Farm Payrolls. Friday’s employment report for August was a mixed bag – while the economy added more jobs than expected, wage growth moderated and the unemployment rate ticked higher. In fact, non-farm payrolls rose by 315,000 through the middle of the month, a slowdown from July’s 526,000 but clearly ahead of consensus forecasts for a 300,000 gain. Wage growth also eased by more than expected, with average hourly earnings rising only 0.3% rather than the 0.4% expected. As such, the annual rate of earnings growth stayed at 5.2%, well below the current rate of inflation. Ultimately, the mixed reading keeps alive the ongoing debate over the size of the next Fed hike. Nonetheless, expectations for aggressive Fed action have solidified since the hawkish speech by Powell at the Fed’s Jackson Hole conference last month.

Last week Europe seems to have been at both the mercy and peril of the hot weather. With the UK producing a jump in retail sales in July, and the river Rhine proving to cause trade issues, leaving vessels in standstill traffic and some cases stranded due to the lack of rainfall. This week’s calendar will bring another tumultuous week of trading with Monday’s focus on the Bank of China’s interest rate decision, and then on Tuesday, eyes will be on Germany’s Composite and Manufacturing PMIs.

GBP
After the CPI figures for July surged to a 40-year high last week, GBP has opened weak against the dollar in particular, following the news from across the pond that a recession may be avoided in the states last week.

Meanwhile, a second day of strike action is underway at the UK’s busiest container port after workers walked out on Sunday in a pay dispute. The Union Unite said around 1,900 of its members were striking, expected to last eight days, at the Port of Felixstowe in Suffolk. If the strike continues as planned there is great concern about the impact of the strike on shipping companies and the delay in imports being received. With companies looking elsewhere within the UK to receive the shipments at alternative shipping ports.

Additionally in the UK, with Inflation set to hit 13% by the end of 2022, the conversation around the cost of living continues with under the ’30s facing a growing cost of renting crisis with statistics showing 4 in 10 of this age group are now spending more than 30% of their pay on rent. Making rental costs unaffordable and extremely concerning as a recession continues to loom. For the Economic calendar, attention is on the PMI data released this week for the UK, Europe and US.

EUR
EUR/USD today has fallen below parity as the market opens this morning, with the US dollar continuing to rally from the previous week’s hawkish Fed expectations. The euro continues to look vulnerable, hitting a 5-week dip with Russia announcing a three-day halt to the European gas suppliers via the Nord Stream 1 pipeline again at the end of August, deepening the EU energy crisis. As well as recession and inflation risks continuing to spiral as the Euro weakens further.

Eyes are on Germany’s composite and manufacturing PMI data released this week. Which could continue to weaken the Euro further if a negative outcome.

USD
After a strong week for USD, hitting a 5-week high, this week we could see the save haven currency strengthen even further after the Feds hawkish announcement of the states (somehow) avoiding the expected global recession. All eyes remain on the Fed policy makers speaking at Jackson Hole this week ( 25-27th Aug) with Fed speakers stressing the message that more rate hikes are coming given “The fight against inflation has not yet been won,” amid growing expectations for Fed Chair Jerome Powell to stress that tightening is “still a long way from the end,” Markets are predicted to remain strong amid Chinese stimulus bets and the European energy crisis.

GBP
The Bank of England has warned that inflation could hit 13% by the end of the year. In addition to the political vacuum and roaring energy prices, parts of the UK are now suffering drought-inducing heat waves. With UK Employment & Inflation numbers being released Tuesday & Wednesday, further harmful economic data could cause GBP to experience an increase in volatility mid-week. If the UK sees both unemployment & inflation numbers up, we will see a weakening of the GBP against the Dollar and Euro.

EUR
The Euro Zone is expected to release similar economic data on Wednesday increasing the chances of volatility across the market mid-week. Employment Change & Gross Domestic Product for Q2 will give us an insight into the European Union’s current economic state. The GDP figures set to be announced will impact the value of the Euro significantly, depending on the positive or negative nature of the data. The GDP is considered as a broad measure of Euro Zone economic activity, and a rising trend will have a positive effect on the currency.

USD
The Dollar is expected to see a slow start to the week, as it tries to increase in value after a poor performance last Wednesday through Friday. On Wednesday the US is expected to release its Retail Sales data for the month of July. Positive changes in US retail sales are seen as Bullish, & the preferred movement of the economy. In addition, the FED will be releasing its Open Market Committee minutes which will give market analysts a clear insight into the future US interest rate policy.

GBP
Last week saw the Bank of England spook the market slightly with aggressive downgrades on the economic outlook alongside an interest rate hike. They confirmed that rate hikes were likely to continue, but the UK is expected to enter a 5 quarter recession later this year with inflation peaking around 13%. Friday’s GDP report also indicated that the UK is already in a recession, however, a rebound is expected in Q3 hence the recession starting in Q4.

On slightly more positive news most economists seem to think that most of the bad news is priced in, with many feeling that the Bank of England is more realistic in its news than the Fed or the ECB. A quiet week data-wise ahead for the Pound, but nervousness still exists around imported inflation and rising energy prices.

EUR
As the Dollar weekend slightly towards the end of last week, the Euro seemed to be the main beneficiary. This, however, is expected to be short-lived. Russia’s continued threat hanging over gas prices is expected to weigh heavily on the single currency, with record electricity prices being faced across the Zone. Drought in Germany may lead to a decline in water levels on the Rhine. This is significant because around 30% of Germany’s natural gas, coal and iron ore are transported along this river and if levels fall too low this will affect the supply chain. The last time this happened was in 2018; it shaved 0.4-0.7% off GDP. Very little data for the Eurozone this week, with the currency expected to be driven by external trends.

USD
Stronger than expected payroll figures on Friday (more than double expectations) saw the Dollar not only strengthen but also increase the likelihood of further hikes in US interest rates in the coming months. This was coupled with the fact that unemployment fell to 3.5%, a near 50-year low, giving the Greenback a confidence boost. US treasury yields are up and there was a sell-off in short-dated bonds meaning the Dollar, while it is a touch weaker, continues to perform strongly relative to a week ago.

Aside from CPI numbers this Wednesday there is very little data coming out of the US. A potential issue to keep an eye on is a weakened outlook out of China, there have been reports of a surge in covid cases which could lead to further lockdowns which could affect the Dollar.

GBP
There was a fair amount of data on Friday for investors to digest. New orders increased slightly as did business optimism, however this was offset by other numbers missing the mark. Services-sector index fell to a 17-month low but did come in above market expectations and finally, UK PMI manufacturing numbers hit a 25-month low – in line with consensus forecasts. The Conservative leadership contest will be of interest this week as both contenders reveal more about their economic policy. With GBP looking particularly fragile to external forces, any unexpected announcements from either potential leader could see increased volatility.

EUR
Euro-Zone, German and French PMI manufacturing index numbers all showed contractions, with the Euro-Zone numbers hitting 25-month lows. Services-sector readings also missed their targets and again there were 15-month lows for the Euro-Zone as a whole. New orders declined which only added to Euro woes meaning the single currency ended the week pretty badly. There are increasing fears over the health of the Zone’s economy with particular concern over Germany. It makes up such a big part of the region and is very heavily reliant on Russian gas, with the German Bundesbank stating that the economy will remain weak, the outlook for energy markets is bleak and inflation is likely to spike. Geopolitical issues continue to weigh heavily on the single currency with volatility expected to continue going into this week.

USD
The Dollar had a reasonably difficult end to the week with the news that the Fed are unlikely to raise rates on Wednesday by the previously rumoured 100 basis points but “only” by 75 basis points. Despite this being a significant raise, the market saw it as a fall in one measure of long-term inflation. All eyes will now be focused on the rhetoric around the decision and any hints as to what the Fed may do at the next meeting on 21st September. Thursday sees US GDP data and Friday sees Core CPE Price Index readings, however, unless there are significant movements above or below expectations Wednesday’s Fed meeting will steal the headlines. One thing of note is that if Thursday’s GDP data sees a contraction, it would mean that the US meets the conventional definition of a recession (the US uses a different definition). This could see the Dollar fall, however, if the global outlook remains poor and this is seen as a prelude to recessions elsewhere, USD could be a safe haven.

A positive start to the new week for global markets has benefited the British Pound but put the Dollar on the back foot, although analysts remain of a view these ‘risk on’ episodes are likely to remain fleeting.

The Dollar was sold and commodities and stocks bought amidst an improved global backdrop that is being attributed to two developments: one regarding China and the other concerning the U.S. Federal Reserve. People’s Bank of China Governor Yi Gang was reported to have said the central bank will step up with stronger support for China’s struggling economy, a development that should cushion against investor fears of further Covid lockdowns in the country.

GBP
A quiet Friday for the Pound saw it gain very slight support during the day. This was due to a combination of virtually no domestic data and strengthening risk appetite which saw the Dollar slip a bit. The Pound had a good week against the Euro off the back of better-than-expected GDP data and the markets will continue to monitor the Conservative leadership race for any hints at economic policy. As the UK braces for potentially record-breaking temperatures, investors will be keeping an eye on the data releases this week of which there are quite a few: labour market, inflation, PMIs and retail sales to name the main ones. Many feel that this data will let us know if we are past the peak of the storm or in the eye of it and will therefore provide a strong indicator as to whether the MPC raise rates by 25 or 50 basis points.

EUR
This could be a very interesting week for the Euro given the data and political situation that we can expect this week. Thursday sees the ECBs decision and council member Rehn has already come out and said that the central bank is likely to raise rates by 25 basis points, which would be the first rate rise in over a decade and would lead to Euro strength. What will be of interest, however, is what Putin decides to do with the Nordstream 1 pipeline. It has been closed since the 11th of July for maintenance and is due to reopen on Thursday. Many believe this could be a way for Putin to put pressure on the EU and, if it remains closed, could end up with the EU in several quarters of recession primarily due to their reliance on Russian gas. What could be seen as positive news for the Euro off the back of the ECB’s potential rate hike could very quickly be reversed if Nordstream 1 remains closed.

USD
US retail sales increased for June (above consensus forecasts) as did underlying sales providing an element of support for the greenback. This support was limited, however, as the numbers were not considered significantly stronger than expected. Consumer confidence edged higher but was offset by lower than expected 1-year and 5-year inflation index numbers. Given the Fed’s close monitoring of inflation, fears of a 100 basis point hike subsided with the Dollar losing a bit of defensive support. Markets will monitor the media very closely as the Fed goes into its blackout period for any indication as to what they are thinking. Data will play its part (as mentioned above) but last time a Wall Street Journal report make a correct prediction which will no doubt play its part this time around.

The end of last week saw the Dollar strengthen even further. A global lack of risk appetite coupled with US Fed Chairman Powell’s comments that the US would be pressing ahead with multiple interest rate hikes despite recession fears drove the greenback higher against both Sterling and Euro.

There are now serious concerns over European economies, most notably the UK and investors are now scrambling to work out what this means for interest rate hikes for the remainder of 2022. This has led to both GBP and EUR selling off versus the greenback, which was perhaps exacerbated further due to reduced flows coming into US Independence day celebrations that resulted in increased volatility.

GBP
Sterling experienced another torrid end to the week, hitting fresh lows against the Dollar. This week has started with fresh concerns and increased UK-EU tensions over the Northern Ireland Protocol.  Despite GBP trading lower, the current Brexit agreement complexities are likely to dissuade traders from placing any bullish bets around the British pound. In the latest development, the UK House of Commons last week voted in favour of a bill that would unilaterally overturn part of Britain’s divorce deal from the EU, which is only adding to the uncertainty. This week we see manufacturing PMI data out on Tuesday, BOE members Pill and Cunliffe speaking Wednesday, before a quiet end to the week for GBP where attention will turn elsewhere.

EUR
Last week saw the Euro drop further against the USD, with a number of investment banks now forecasting we may see the currency cross trading below parity by the end of July. There are fresh concerns over the inflationary pressures broadening in the Eurozone amid no end in sight to the soaring energy and commodity prices being driven by the continued conflict in Ukraine. A number of major economies are now expected to fall into recession over the next 12 months and the ECB is under pressure to get out of negative interest rates and give themselves increased headroom to deal with the situation should recession be confirmed across the Eurozone. Economic data releases are relatively light this week with the exception of retail sales for May being released on Wednesday, which will be another indicator as to the likelihood of a recession.

USD
Markets are closed in the US today which will likely be the quiet before the storm of key data releases later in the week. Investors will be looking to see if economic data to be released later this week backs up the current strength of the Dollar, namely June Services PMI data on Wednesday which will give a good update on the state of the economy, as well as FOMC minutes from the June Federal Reserve meeting being released. Thursday will then bring initial employment data before the key data point of the month for USD on Friday, Non-farm payrolls. Investors are still expecting a strong number which could bring about another volatile end to the trading week.

This week we will see the release of many reports from all three major Central Banks, as the last few days of June and the start of July will bring about the usual burst of significant data.

President of the ECB Christine Lagarde is expected to have a speech every day Monday through Thursday to discuss the released data. Bank of England Governor Bailey is expected to speak on Wednesday as UK GDP Growth Rate reports will be released on Thursday. We will also see the release of Nationwide Housing Prices and BoE Consumer Credit reports on Thursday & Friday. The US is expected to have a packed week with multiple speeches from the FED, including FED Chair Powell on Wednesday. House Price Index, GDP Price, Growth & Sales are all expected to be handed to the public on Tuesday & Wednesday.

GBP
The Pound had an average display of strength last week, finishing slightly stronger against both the USD & EUR. The pound had some rather tricky data reports to navigate last week with UK inflation and retail data. Inflation was reported at a staggering 9.1%, up 0.1% from the April print. On Friday, we saw disappointing UK retail sales data with a decline in growth by -4.7%. Price action was relatively unphased as the cost-of-living squeeze is priced in.

EUR
The economic calendar is filled with high-impact events in the coming week focusing on inflation from both the U.S. and EU. EU inflation is expected to hold at 3.8%, but anything higher could trigger hawkish ECB bets and potentially push the euro higher. The aggressive outlook from the Fed is likely to negate any significant euro gains in the coming weeks. A series of important appointments for the Euro including Spanish and German inflation figures on Wednesday, which will inform market expectations for Friday’s Eurozone numbers, and retail sales data from Germany on Thursday. Economists and financial markets will be looking to see if April’s -5.4% month-on-month decline in German retail sales deepened last month and this point, along with the inflation data out on Friday, potentially has the ability to further impact expectations for ECB interest rates in the months ahead. Thursday’s German retail sales number will offer important insight into how Europe’s largest and generally most resilient economy is faring amid the commodity price shock but equally important will be whether this Friday’s Eurozone inflation figures follow in the direction of the UK’s and other central banks.

USD
With the latest FED rate hike now in the rear-view mirror, the US Dollar fell for the first time in four weeks, dropping by -0.26%. EUR/USD rates increased by +0.61% while GBP/USD rates gained +0.44%. Many eyes will be watching the FEDs movements closely this week in anticipation of the data release, as the USD remains the current stable currency in a world of economic unease. Chairman Powell merely reiterated remarks already made in the press conference following June’s decision to lift the Fed Funds rate by a large 0.75% increment, taking it up to 1.75%, although they had a much more palpable impact on stock and bond markets last week than on their first iteration. All of this leaves a lot to be determined this week by the flurry of important economic figures due from the U.S. over the coming days, which includes the May edition of the Fed’s preferred measure of inflation; the Core Personal Consumption Expenditures Price Index. Consensus expects the Core PCE Price Index to rise by 0.4% for last month, up from 0.3% previously, but to fall from 4.9% to 4.8% in annual terms.

European stock markets are expected to open sharply lower this morning, continuing the global sell-off after red-hot inflation data in the US raised fears of aggressive Federal Reserve monetary tightening.

Following the data release, the dollar climbed to a near four-week high against a basket of currencies on Friday, after data showed U.S. consumer prices accelerated in May, strengthening expectations the Federal Reserve may have to continue with interest rate hikes through September to combat inflation. In fact, it’s going to be a big week for central banks, with the Federal Reserve widely expected to deliver a second 50 basis point rate hike on Wednesday. Investors will be watching closely to see what Fed Chair Jerome Powell has to say about future rate hikes after Friday’s much stronger than expected inflation data. The Bank of England is expected to deliver a fifth consecutive rate hike amid a mounting cost of living crisis.

GBP
The Bank of England was the first major central bank to start reversing its pandemic stimulus back in December but that did not stop U.K. inflation hitting a four-year high of 9% in April, almost five times the BoE’s 2% target. Following through with their roadmap, the BoE is widely expected to deliver what will be its fifth consecutive 25 bps rate hike since December on Thursday, despite a growing number of global central banks opting for half-point hikes. Nonetheless, the BoE expects inflation to exceed 10% later this year and Governor Andrew Bailey said in April the bank was walking a very tight line between tackling the surge in inflation and causing a recession.

It’s also a busy week for U.K. economic data, starting with GDP figures for April which will be released today and are expected to be flat. On the other hand, employment data on Tuesday is expected to point to continued tightness in the labour market, with unemployment seen declining while wage gains accelerate.

EUR
The possibility of a more aggressive hiking cycle later in the year is weighing on sentiment as the Eurozone economy struggles with slowing growth, exacerbated by the war in Ukraine, as well as rampant price increases. In fact, the euro lost ground on the prospect of the European Central Bank raising interest rates in a slowing economic environment. At her press conference on Thursday of last week, ECB President Christine Lagarde declined to give any concrete detail as to how the ECB intends to keep bond yield spreads within an acceptable range as it embarks on its first monetary tightening in 11 years. By contrast, she gave unusually detailed guidance about the path of interest rates, which may be 75 basis points higher by the end of September.

USD
The Fed is all but certain to raise interest rates by another 50 basis points on Wednesday, adding to the 75 bps of rate hikes already delivered since March.  Friday’s hot May inflation data has revived fears that Powell could flag a faster pace of future rate hikes; data showed that U.S. consumer inflation jumped by 8.6% year-over-year in May, its biggest gain since 1981 with gasoline marking a record high and the cost of food soaring. This has prompted concern for investors that an aggressive push higher on interest rates could tip the economy into recession. In fact, market watchers will be keeping a close eye on Powell’s press conference after the policy meeting and on the Fed’s updated economic forecasts as well as its “dot plot”, which shows the projected outlook for interest rates.

As the UK returns from a long weekend celebrating the Queens Platinum Jubilee, many headwinds are already setting the tone for the week ahead.

Prime Minister Boris Johnson will face a vote of confidence later today after the British leader was booed at various events over the past few days. Johnson, appointed prime minister in 2019, has been under growing pressure, unable to move on from a damaging report over parties held in his Downing Street office and residence when Britain was under strict COVID-19 lockdowns. If Johnson loses a confidence vote, he would be removed as prime minister and there would be a leadership contest to decide his replacement. In fact, there’s a growing risk the nation’s current account deficit, political turmoil, a deterioration of its relationship with the European Union over Northern Ireland and questions around the central bank’s credibility combine to create a “perfect storm.”

On the European front, equities ended last week on a negative note as data showed the U.S. economy added 390,000 jobs in May. This was more than expected and prompted investors to reassess the potential for rising interest rate hikes by the Federal Reserve in the months ahead. With this in mind, investors are keenly awaiting the release of Friday’s U.S. CPI report for May as this will act as a key input before the Fed decides how much to hike rates next week. Ahead of this, the European Central Bank meets on Thursday and is expected to use this get-together to make clear that rate hikes will be coming in the third quarter.

GBP
It’s not the first time in recent years Wall Street strategists have drawn parallels between the British currency and emerging markets. The comparison was made amid the UK’s torturous exit from the European Union, where political headlines whipsawed sterling as its behaviour broke from major peers.

Whilst not wishing to over-exaggerate GBP’s predicament as some kind of ‘end-of-days’ scenario, there are concerns that the increasing politicization of UK policy undermines the GBP in ways that would appear EM-like. There is a sense that something is changing in the UK, with the BOE increasingly hard to decipher and less transparent; a failure to discuss and acknowledge that Brexit has been a significant headwind to the supply side; and a sense that the BOE is losing control over its mandate.

In fact, the BOE has faced political attacks this month over its response to inflation, which is at its fastest rate in four decades. Despite four interest-rate increases since December and money markets bracing for more in each of its next five decisions, the pound is the third-worst performing major currency this year. At a point of increased uncertainty over domestic growth, signs of regional fragmentation and Northern Ireland-related risks, the UK will find it increasingly difficult to attract portfolio flows to finance a widening current-account deficit.

EUR
Top of the agenda for many market participants this week is Thursday’s meeting by the European Central Bank, which is expected to prepare the ground for an interest rate hike at its July meeting. While central banks around the world have begun their rate hike cycle, the ECB is seen as a step or two away from it. Eurozone inflation hitting record highs, though, has added more urgency to the discussion, and analysts expect this meeting to make clear that rate hikes will be coming in Q3. ECB president Christine Lagarde said as much in a blog post two weeks ago, so both the ECB statement and the press conference to follow will provide a chance for Lagarde to elucidate the road back to positive interest rates and to re-affirm the bank’s credibility. As of writing, market participants are currently pricing in a 125-basis point hike at the ECB’s four meetings this year. In fact, the EUR/USD rose 1.67% since the end of April and 3.55% from mid-May lows, suggesting the bank has re-won at least a little bit of that credibility with markets.

USD
Friday’s U.S. CPI report for May comes a few days before the next Federal Reserve meeting and will act as a final input before the Fed decides how much to hike rates. Inflation is expected to come in at 8.3% year over year, while core inflation (excluding energy and fuel prices) is expected to come in at 5.9% year over year. The latter number would mark the third month of consecutive declines and make the case that core inflation may have peaked, which would echo the slower wage growth in last week’s jobs report. At the same time, the overall inflation number of 8.3% would be close to the peak and given the pain at gas pumps and grocery stores, consumers may take little solace in knowing the core number is levelling out.