Election fever hurting stocks in Europe

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Stock markets in Europe are feeling the effects of political uncertainty. The FTSE 100 has been on a downward trend since Rishi Sunak announced his plans for a General Election. The European Stoxx 50 has lost around 5% post-Euro election results and Macron’s election call. The Euro has consistently lost ground against the US dollar. The S&P 500 has been boosted in the past few days as there are increasing signs that the recent relative weakness in the US economy is starting to feed through into prices. After the slightly better-than-expected Consumer Price Index, Producer Prices unexpectedly fell in May, while the core PPI remained unchanged. Wholesale prices also fell unexpectedly in May. Last week’s data would indicate a significant slowdown in the core PCE measure. The Fed dot plot, post last week’s meeting, still indicates one cut this year; the market is now looking for two. Two-year US treasury yields are at their lowest level for a month. However, the bond market still seems to smell like a rat as that inverted yield curve just got more inverted. It’s fair to say that UK stocks may not have taken the announcement of the upcoming election well, but the news has had little impact on the pound or the gilt market at this point, anyway.

Stocks in the US may continue to rise, but according to Barclays Research, investors are becoming increasingly focused on tech and rotating out of almost all sectors. The gap in valuations between tech and the rest of the S&P 500 is getting wider. The S&P equal weighted price-to-earnings ratio is now below 17, as the average S&P 500 stock is trading at an increasing discount to the index. A standard question asked these days to economists and strategists on popular business channels is, are we in a tech bubble? Some say yes, and others say no, and they place their arguments. To me, it’s beginning to feel a little 2000’ish. At that time, stock investors also wanted to ignore all else in favour of tech; of course, that period did not end well for the tech sector in the short term, at least.

What do we have to look forward to this week? The Bank of England takes their turn on the world stage, as they are not expected to cut rates at this month’s meeting. Politically, and possibly some would say economically, it would not be wise. However, as always, we will wait and see how the voting goes and what Mr Bailey makes of the outlook for UK interest rates. Ahead of the meeting, the Bank of England policymakers get a raft of inflation and sales data to pour over. Which apparently may be skewed by Taylor Swift appearing on our shores. Australia, Brazil, Switzerland, Norway, and Indonesia are in a busy week for policy-watchers. The central banks of Switzerland and Australia are not expected to change rates, and likewise Brazil and Norway. Towards the end of the week, we get the monthly flash Purchasing Manager surveys. As for the US, a week never goes by without some activity data. This week included retail sales and industrial production figures, providing clues as to GDP strength in the second quarter. Stocks in Europe appear to be starting the week on a better note.