European stocks are edging lower after struggling to maintain momentum at all-time highs. Not even calming words from Federal Reserve Chair Jerome Powell or signs of a strong economic recovery in the region managed to lift the cloud hanging over stocks in Europe.
The market is still adjusting to the Fed’s hawkish shock last week when it projected two interest rate rises in 2023. Fed Powell attempted to put a dovish spin on last week’s hawkish surprise, playing down fears over rising prices and sticking to the well-rehearsed script that surging inflation is transitory.
There will be a period of readjustment as the markets take this on board and digest the evolving economic position of the US and the Fed’s change in tone.
Eurozone PMI data revealed that business growth accelerated at the fastest pace in 15 years in June. As vaccination numbers rose, pandemic restrictions eased, and pent-up demand was unleashed, spurring on the economy.
Activity in both manufacturing and services is booming. The composite PMI hit 59.2 in June, up from 57.1 in May and well ahead of the 58.8 forecast. Breaking it down into countries, Germany outperformed with services sparking back into life as lockdown restrictions were lifted. On the other hand, France was a little disappointing. While business activity grew, it did so at a slower pace than expected.
The FTSE is outperforming its European peers, boosted by oil and resource stocks. Oil majors are lapping up surging prices in crude and brent, which hover at fresh multi-year highs.
Looking ahead to the US open, US futures are looking more placated by Fed Powell’s words than Europe. Comments from the Fed’s head honcho appear to be calming the rattled market stateside. Moreover, the downplaying of the risk of an early move to tighten monetary policy has lifted sentiment, with the tech-heavy Nasdaq the clear winner.
FX – GBP rises as inflationary pressures build
The US dollar is edging lower post Fed Powell’s comments and as investors look ahead to more Fed members hitting the airwaves. Furthermore, John Williams, an influential Fed member, said that more progress is needed before they start to taper, adding to the softer tone surrounding the greenback.
The pound is advancing after PMI data once again impressed, revealing the UK economy is still firing on all cylinders as it ramps up from the pandemic. However, the data also highlighted mounting inflationary pressures as input costs surged higher. This suggests that consumer prices, which are already above the BoE’s 2% target, could push higher still. Investors will be watching the BoE closely tomorrow to see if the data will prompt the UK central bank to act sooner.
Oil – Brent hits USD75
Oil prices only appear to go in one direction lately. Both oil benchmarks are on the rise on Wednesday as demand continues to outstrip supply. Thanks to successful vaccination programmes, economies are reopening, and fuel demand is ramping up. Strong demand is draining inventories, boosting oil prices towards fresh multi-year highs.
The API inventory data revealed a draw of 7.1 million barrels for the week ending 18 June. This was a larger draw than expected and came following an 8.5 million barrel draw the previous week. The fact that inventories are being drained highlights the mismatch between supply and demand.
Attention is now turning to OPEC+, which meets next week to decide its production strategy going forwards. Given the improving demand outlook and the fact that Iranian oil is unlikely to come flooding back to the market any time soon, there is a good chance that some OPEC + nations such as Russia will push for a production increase from August.
Gold edges unconvincingly higher
Gold trades in a narrow range, edging higher as investors continue to digest Federal Reserve Jerome Powell’s soothing comments, which stated the Fed wouldn’t hike rates on inflation fears. Powell’s confirmation that there will be no pre-emptive interest rate rise has enabled gold to find a floor and attempt a rebound, albeit a rather lacklustre rebound. At the end of the day, the damage was done last week when the Fed caught the market off guard with its hawkish shift. Despite Fed Powell’s dovish take on the Fed’s hawkish move, gold bugs aren’t taking the bait. After tanking 6% last week, a 0.3% rise today is barely touching the sides of the sell-off. USD1800 is acting as a clear line in the sand for the buyers. Even with a weaker US dollar, this level looks optimistic. While Fed speakers later today and PMI data could garner some interest, attention will start turning towards Friday’s PCE inflation numbers.
