European stocks are set to start the new week firmly lower as the economic outlook continues to deteriorate.
· China tightens lockdowns, export data deteriorates, AUDUSD falls towards the 2022 low
· G7 unveils sanctions on Russian oil raising inflation and stagflation fears in Europe
· Fed speakers are expected to continue the hawkish chorus, USD index trades over 104.00
US indices ended last week in the red despite the upbeat US non-farm payroll data. The US labour market saw 428k new jobs added in April, well above the 390k forecast. The unemployment rate held steady at 3.6%. With 11.5 million vacancies, the US labour market is very tight, which is giving the Fed room to act aggressively to hike interest rates. The Fed hiked rates by 50 basis points last week.
Meanwhile, the BoE was considerably more downbeat regarding the economic outlook for the UK, amid fears of stagflation and an economic contraction now expected in 2023.
The economic pain points for the global economy are well known: the ongoing Russian war and rising COVID cases in China.
China lockdowns
China is showing no sign of letting up its zero-COVID policy with lockdown restrictions tightening in Shanghai. The restrictions are reflected in data with PMIs last week showing that services activity fell by the second most in April, and manufacturing slumped to a two-year low. Chinese trade data showed that export growth tumbled to 3.7% in April, down from 15.7% in March. Virus disruptions are taking their toll, but foreign demand is also weakening as global growth slows.
AUDUSD trades -1% and is falling for a fourth day as the market mood sours and concerns over China’s economy grow. Sellers are testing 0.70 psychological level at the time of writing; a break below here to 0.6970, the 2022 low is needed to continue the bearish trend and open the door to 0.69.
The downbeat session in Asia is set to kick European stocks lower on the open. The FTSE points to a 0.9% fall on the open and the DAX a 1.3% decline.
Russian war
Concerns over the Ukraine war and the impact of western sanctions on the European economy remain a key theme. Last week the EU proposed a phased-in embargo on Russian oil, which sent energy prices surging. Oil jumped over 5% across the week and trades comfortably over $110, fuelling stagflation fears.
Over the weekend, the G7 also committed to phasing out Russian oil in the latest attempt to pile pressure on Putin for the invasion. Combined with the fact that OPEC refuses to be drawn into the mix, these moves could keep oil prices on the trajectory towards $116, the March 24 high.
Coming up
Looking ahead, the economic calendar is light today. Eurozone consumer confidence is expected to deteriorate further. Meanwhile, a stream of Fed speakers is set to hit the airwaves and are likely to continue the hawkish calls. USD is powering higher, building on last week’s gains above 104.00 and a 20-year high.
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