After a solid start to the week, European bourses are set to open lower on Tuesday as sentiment sours on rising inflation and growth concerns.
· RBA catches the market off guard with a 50bp rate hike(!) AUD/JPY rises to a 7-year high
· German factory orders unexpectedly fall -2.7% MoM on supply chain disruptions
· The pound plunges after PM Boris Johnson scrapes through the no-confidence vote
The market mood was broadly upbeat on Monday as Beijing continued to ease lockdown restrictions. However, Wall Street closed off session highs as the 10-year treasury yield once again pushed above the key 3% level.
RBA
A surprise overnight outsized rate hike by the RBA highlighted rising concerns over soaring inflation. The RBA caught the market off guard and raised interest rates 50 basis points, above the 25 basis points expected and the central bank’s largest rate hike in 22 years. The move takes the cash rate to 0.85% as the central bank attempts to quash inflation before it gets out of control.
Stocks across Asia moved lower following the announcement, which is set to add further pressure to struggling households.
AUD/JPY briefly rose to a 7-year high of 96.14 following the announcement and continues to trade in positive territory. AUD/USD briefly spiked above 0.72. However, the pair has since fallen and trades lower on the day as the deteriorating market mood boosts demand for the safe-haven USD.
ECB
The downbeat mood in Asia is transferring to a weaker start in Europe. Investors are increasingly nervous about potential monetary policy tightening to combat inflation.
The ECB will meet on Thursday to discuss monetary policy and is expected to prepare the market for rate hikes in Q3. Fears are rising that the ECB could signal a steeper path to tightening policy to tame inflation, which sits at a record high of 8.1%.
German factory orders
Adding to the downbeat mood, German factory orders unexpectedly fell in April, down -2.7% MoM, defying expectations of a 0.4% increase. China’s lockdowns pressurised supply chains which were already disrupted by the Russia, Ukraine war. The fall marks the third straight drop and comes as expectations for German economic growth have been slashed. The Bundesbank now expects a slight rise in Q2 GDP at best.
The DAX is set to trade -0.85% lower on the open.
Boris Johnson
The FTSE is holding up better than its European peers and is expected open -0.20% lower, owing to the weaker pound, which is beneficial for the many multinational companies listed on the index.
GBP/USD has tumbled 0.7% in early trade following Prime Minister Boris Johnson’s unconvincing win in the vote of no confidence last night. Boris Johnson won by a very modest 59%, which raises questions over how long he can cling to power. Rather than removing political concerns, the vote appears to have added to them.
In addition to the political uncertainty, concerns over the UK falling into recession continue to drag on the market mood. UK services PMI data is expected to confirm the steep fall from 58.9 in April to 51.8 in May for the dominant sector, whereby the level 50 separates expansion from contraction.
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