Big tech shelters US markets with rise in Crude hurting European equities

European markets are heading lower, as risk aversion builds off the back of yet another damaging phase of this crisis. In what began as a military conflict, we now appear to have entered a period where both sides believe they can wage war by cutting supply routes and inflicting both economic and political damage on their opponent. This leaves the world in limbo, with businesses around the globe weighing up the potential damage being done with each day that passes. While previous market moves were driven by escalation and deescalation of the conflict, we are now heading towards a slow grind higher for energy prices as the prospect of a drawn out stalemate comes into play. The Iranian seizure of vessels in the Straits will be seen as a show of strength following a somewhat embarrassing climb-down from Donald Trump this week, and the concern for many is that the chances of an acceptable solution to this crisis seems less likely with the IRGC clearly taking a key role in the decision-making. Thus while both sides will likely want a reasonable exit from this crisis, both want to be seen to have emerged victorious which is a difficult nut to crack given the wide range of red lines stated by both sides. 

Today brings a raft of PMI surveys across the globe, with the initial releases providing a surprisingly strong set of indicators thus far. Manufacturing appears to have been the one notable area of strength, with Australia (51.0), Japan (54.9), France (52.8), eurozone (52.2), and the UK (53.6) all posting notable upticks in the pace of growth for April. Given the wider backdrop of a burgeoning energy crisis, there is a strong case to be stated that businesses and individuals are front-loading purchases or stockpiling ahead of the impending surge in inflation pressures. Price pressures have undoubtedly increased, with the UK seeing input cost inflation accelerating to the highest level since November 2022. However, for the time being we are seeing business activity largely improve in the manufacturing sector in particular, with services looking the one area of weakness in the eurozone.

Markets continue to be driven by inflation expectations, with the trajectory of oil prices setting the tone for everything else. With WTI reaching the $100 mark once again, traders are fearful of a fresh resurgence that could dampen sentiment across the likes of equities and precious metals. Notably, the US market has been carried by big tech, with the outperformance of the Mag7 helping to lift the S&P 500 into fresh record highs despite the uptick in energy prices. Thus while the rise seen for crude may be dealing a blow to the likes of gold and silver, it is the European markets that are more closely correlated to wider market sentiment right now owing to the lack of a big-tech narrative to overshadow the declines seen for pro-cyclical stocks. With that in mind, US markets appear to be relatively sheltered for the time being, with the pessimists instead seeking to short European equity markets as crude ticks higher each day that this conflict continues.