European stocks take a hit

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Ahead of the UK Consumer Price Index this morning, UK shares reacted heavily to Tuesday’s employment report, which saw wages climb faster than expected; at the same time, the unemployment rate climbed to 4.2%. Rising unemployment should be music to the rate cutters, but rising wages played a sour note. The gilt market focussed on the wages report sending gilt prices lower, and equities followed suit. Industrials and resources shares some of the hardest-hit sectors. The UK indexes were not alone in falling sharply yesterday, as it was not a good day for European shares en mass. This would suggest yesterday’s employment report was not entirely to blame for the falls in UK stocks.

The much-anticipated monthly UK inflation data reported that UK inflation fell again, from 3.4% to 3.2%, maybe not quite as much as hoped. However, the year-over-year core rate did fall in line with expectations. Services inflation at 6% was likewise ahead of expectations. On a slightly brighter note input prices fell by more than expected, which is good news, as output prices remain steady, which should help profit margins.

In a potential response to the latest US inflation data, Jerome Powell, the Chairman of the Federal Reserve, acknowledged yesterday that inflation is persisting at a high level and the Fed is prepared to ‘wait as long as is needed’ to implement interest rate cuts. Bets on the June rate cut are taking another hit. US equities have sold off recently, but overall, they seem to remain remarkably resilient to higher rate expectations and a stronger dollar. Monday’s rebound in US retail sales will reinforce the economic resilience and add to the uncertainty around rate cuts.

In its latest global report, the IMF raised, if only very modestly, its expectations for global growth this year, partly because it sees the US economy remaining robust and some resilience in emerging markets. According to the IMF forecast, the global economy will grow by 3.2% this year and by a similar amount in 2025. These reports always seem to focus on what we know: inflation will remain above the 2% target this year, geopolitics is a risk, it’s too early to see what impact the Middle East could have on oil prices etc, etc. The IMF remains cautious about economic growth in China, despite the stronger-than-expected first quarter, and concedes they may upgrade their expectations in the coming months. When it comes to IMF forecasting, the phrase caveat emptor comes to mind as its track record is pretty poor at predicting future economic events.

If nothing else, the past week’s events, the increase in geopolitical uncertainty, and the reduced odds of a cut in US interest rates have blown away some of that bullish optimism for stocks. The CNN Fear and Greed index has fallen sharply, and money flows have shown unease; the Vix index jumped, as has Goldman’s panic index. The S&P 500 has fallen back below its 50-day moving average.

After yesterday’s falls stocks in Europe are expected to open on a slightly more positive note.