Sliding stocks
A summer slide in stocks may have begun this week with European stocks falling to their lowest levels in 2 months. US debt ceiling talks dragged on, UK inflation ran hot prompting calls for even higher UK rates, and geo-political risk continued in the background. Although the US debt ceiling issue is expected to be resolved by next week at the latest, the closer we get to the June 1 deadline, the greater the chance there is of a default. So, this is now a game of political brinkmanship with serious economic risks at stake if it goes wrong.
Other key events from the past week
USD: Debt ceiling talks, May 22: Debt ceiling talks still dominated markets this week. With a deadline of June 1 being circulated the risk is that the US may head into a default if the debt ceiling is not raised. If the US defaults on its debt then some analysts see a 15% correction lower in the S&P500 possible.
UK inflation data: Hot inflation, May 24: Going into this inflation print it was going to be an important one for BoE policy. The headline came in at 8.7% y/y and the core above all economist’s expectations at 6.8%. Interest rate markets immediately priced in a 100% chance of a 25 bps June rate hike from the BoE.
Euro Stoxx: European stocks sink, May 24: A flurry of negative sentiment news hit European markets this week. High UK inflation, geo-political tensions, debt ceiling talks, and weak seasonal stock patterns all sent European stocks to their lowest levels in 2 months midweek. Are there more falls to come?
Key events for the coming week
EUR: Eurozone inflation, June 1: Eurozone inflation data is expected to fall in May to 6.5% y/y from 7% prior. Investors will watch the inflation print closely. If the print comes in higher than expected then watch for potential EUR strength.
Time for Illumina to shine?
USD: US labor data, June 2: US labor data next week will be a major focus for investors. Investors will look for signs of weakness in the US labor market to confirm a Fed pause in rates. Watch the EURUSD closely for volatility over the US labor print next week.
Author
Giles Coghlan LLB, Lth, MA
Financial Source
Giles is the chief market analyst for Financial Source. His goal is to help you find simple, high-conviction fundamental trade opportunities. He has regular media presentations being featured in National and International Press.
