Global markets fell this week

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The FTSE 100 slumped on Friday morning and gave up much of its gains through the week after jitters rippled across the Atlantic from the US overnight.

London’s flagship index had scaled beyond 8,000 on Tuesday on the back of a buoyant performance from the capital’s miners and oil majors and signs of life from the stuttering Chinese economy.

However, the FTSE 100 tumbled beyond one per cent in early trading Friday to a round 7,902 after a negative mood dictated trading towards the end of the day on Thursday. US markets often dictate what happens to other markets around the world; the FTSE will often move more on the back of US inflation figures than it will on UK inflation figures.

While this is frustrating, and this week’s drop was due to a US fall overnight while the UK/European markets were illiquid, it is simply the nature of the markets and traders have to accept it.

“The FTSE 100 has gone backwards on its last trading day of the week, as investors digest PMI data as well as a downbeat tone over in the US,” said Sophie Lund-Yates, an equity analyst at Hargreaves Lansdown. 

“The major indices all shed between 1.2-1.4per cent late on Thursday, with broad-based declines suggesting the malaise is a widespread mood problem, rather than a sector-specific issue.”  This impacted European markets which didn’t get the bounce back the US enjoyed simply due to fewer buyers on Friday.

Airline EasyJet and gambling firm Entain were the fastest fallers on London’s blue-chip index, with both tumbling beyond three per cent.

On the week the FTSE dropped 0.52%. We expect it to retest the highs of 8000 and then move beyond.

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In Europe

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In Europe the STOXX Europe 600 Index fell 1.19% during the holiday-shortened week, snapping 10 straight weeks of gains. Hawkish comments from some U.S. Federal Reserve policymakers and higher crude oil prices cast doubt on the timing of interest rate cuts. France’s CAC 40 Index, Germany’s DAX and Italy’s FTSE MIB all posted falls on the week.

Headline annual inflation in the eurozone decelerated more than forecast to 2.4% in March from 2.6% in February. Core inflation, which excludes volatile food and energy prices, also slowed to 2.9% from 3.1%. The year-over-year increase in service prices, however, came in at 4.0% for the fifth consecutive month.

Evidence suggests that the economy may be picking up after stagnating for the past year. S&P Global revised its estimate for the eurozone’s composite purchasing managers’ index (PMI), which includes services and manufacturing, to 50.3 in March from an initial 49.9. A reading above 50 indicates an expansion of private-sector business activity.

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In the US

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In the US the large-cap indexes pulled back from record highs, as U.S. Treasury yields increased in response to signs that the manufacturing sector might finally be gaining traction. The market’s performance also narrowed again, with growth stocks faring better than value shares and large-caps falling less than small-caps. Energy stocks outperformed as oil prices reached their highest level since October on worries over rising tensions between Israel and Iran and a decision by major exporters to maintain production limits despite tight markets. Some late strength in Microsoft also boosted the technology sector.

The Friday jobs report from the Labor Department, typically among the most closely watched indicators of growth and inflation pressures, appeared to further reassure investors. Employers added 303,000 jobs in March, well above expectations and the most in nearly a year. Encouragingly, from a wage pressures standpoint, the solid gains came with only a modest increase in average hourly wages, from 0.2% in February to 0.3% in March. 

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In Asia

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Japan’s stock markets fell over the week, with the Nikkei 225 Index slumping 3.4% and the broader TOPIX down 2.4%. Heightened geopolitical tensions and uncertainty about the U.S. Federal Reserve’s monetary policy trajectory weighed on global equities in general, while in Japan, speculation remained rife about whether the authorities would step in to prop up the yen. 

Last month, the central bank lifted short-term interest rates out of negative territory for the first time in over seven years — market participants seem to be converging around a view that two more rate hikes within the space of a 12-month period are likely. Nevertheless, Japan’s monetary policy remains among the most accommodative in the world, and financial conditions are expected to remain accommodative as well, for the time being.

Chinese equities advanced in a holiday-shortened week, as data added to evidence that the economy could be gaining traction. The Shanghai Composite Index gained 0.92%, while the blue-chip CSI 300 added 0.86%. In Hong Kong, the benchmark Hang Seng Index rose 1.10%, according to FactSet. Markets in mainland China were closed on Thursday and Friday in observance of the Qingming Festival, also known as Tomb Sweeping Day, when Chinese people honour their ancestors by cleaning and placing offerings on their tombs. Hong Kong markets were closed onThursday but reopened on Friday.

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What to expect this week

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This theme has never really gone away since Israel invaded the Gaza Strip but the risks of the conflict spreading across the Middle East are rising once again, and that leaves markets such as WTI crude oil, gold and global equity indices vulnerable to incoming headlines.

PCE inflation data came in as expected last week, and that now shifts attention to the headline US CPI report next week. Some Fed members remain unconvinced that inflation is under control, so traders really need to see it dip lower next week to stand any chance of a June Fed cut. 

It is unlikely we will see any change in monetary policy from the ECB, BOC or RBNZ next week. But excitement is building that the ECB may cut as soon as June, which begs the question as to whether it will be discussed next week.

But if prior ECB communications are anything to go by, we may be left disappointed. Besides, the Fed continue to push back on cuts, and we therefore doubt the ECB will feel inclined to signal such a move ahead of the Fed, two months ahead of June.

With markets feverishly trying to decipher whether the BOE will cut ahead of the Fed (and more aggressively this year), UK economic data remains a key driver for sentiment towards the British pound.

Traders will therefore keep a close eye on Friday’s data dump ahead of the UK open, which includes industrial production, construction output and trade balance data. Ultimately, softer-than-expected data will likely drive bets the BOE may act sooner, even if they have claimed that current market pricing is too dovish.

We have seen this tactic in the past from the Bank of England. Mark Carney back in his day would often say the market was wrong only for it to later be proven to be right. They will push back against anything they feel might lead to a resurgence of inflation. However, we feel BoE will cut rates before the Fed and will likely do so fairly soon in the early summer months.

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