After indiscriminate selling across all asset classes yesterday, European stocks are set to open modestly higher.
· Stocks attempt a small rebound but recession fears remain
· German economic sentiment is expected to deteriorate, EURUSD shows resilience
· Oil tanks as demand fears rise on global economic worries
The straw that broke the camel’s back yesterday appeared to be the weak Chinese export data. The markets have been focused on the prospect of a recession in Europe and a slowdown in growth in the US as the Fed hikes rates aggressively. However, the assumption has been that China, with a supportive fiscal and monetary policy from authorities, would strongly support the global economy.
Yesterday, as export growth dropped to the lowest level in almost two years and as authorities showed no sign of letting up its zero-COVID policy, the reality hit home that China is unlikely to be such a great support to the global economy and could, in fact, add to supply chain disruptions, and mounting inflationary pressures.
The selloff was brutal, with the Nasdaq closing 4.3% lower, which sees the index down around 10% in just three days. The S&P closed below the critical 4000 level, and the safe-haven US dollar index rallied over 104.00 to a 20-year high.
Today, the market mood is calmer; with risk assets attempting a bounce, the FTSE and the DAX, which closed over 2% lower yesterday and below the April lows, are pointing to a 0.3% and 0.7% rise respectively at the open. However, gains could be limited as concerns over rising interest rates and recession fears remain key themes for the market
German ZEW economic sentiment
The economic calendar remains quiet again today with the focus in the European session on ZEW German economic sentiment data, which is expected to show a deterioration to -42.5 in May, down from -41 as the experts surveyed grow more pessimistic over the outlook for Europe’s largest economy.
While major peers fell sharply against the USD yesterday, the euro showed resilience, despite dismal data and pushed higher towards 1.06. EUR/USD is extending those gains again today as optimism surrounding a July rate hike overshadows the region’s weak economic outlook. Buyers will look for a move over 1.0640 to form a higher high. Support can be seen at 1.0470, the 2022 low.
Oil
Oil prices are falling around 1%, heading towards the European open, extending losses of 5.8% from Monday as demand fears stemming from tighter lockdown restrictions in Shanghai and Beijing, in addition to growing recession fears, overshadow supply concerns.
Oil demand is closely tied to global economic growth, which is expected to slow dramatically as central banks hike interest rates to tame runaway inflation.
Oil prices had rallied last week after the EU proposed a phased-in ban on Russian oil. However, approval of the plan has been delayed as some Eastern European countries push for exemptions or concessions.
API inventory data is due later today.
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