Poor German GDP adds to Europe’s woes
It is another painful day on the markets as traders are dumping stocks. Continued concerns about the possibility of several interest rate hikes from the Federal Reserve and the Russia-Ukraine standoff is weighing on the mood once again. On Wednesday, Jerome Powell, the Chair of the Federal Reserve didn’t rule out the possibility of raising interest rates seven times this year. That message has set the scene for next week’s updates from the Bank of England (BoE) and the European Central Bank (ECB). Last month, the BoE caught many off guard when it hiked interest rates, and there is chatter the bank will look to lift rates a few times this year. The ECB is unlikely to be raising rates anytime soon, but if the other major central banks are heading down that route, it could influence the language of the ECB.
Sticking with the eurozone, the region posted mixed growth reports today as French and Spanish GDP readings were 0.7% and 2% respectively, while Germany’s economy contracted by 0.7% in the final quarter of last year. The negative German reading has sparked speculation the country could be on the path to a recession. It comes at a time of heightened tensions in Eastern Europe, and Germany is heavily reliant on natural gas from Russia. Should a war break out, it could disrupt energy supply lines to an already weakened Germany economy. The selling pressure in Europe is greater than that of the US, as the DAX and the FTSE 100 are down 1.8% and 1.5% respectively, while the Dow Jones is off 0.3%. It is possible that dealers are cutting their exposure to European equities ahead of the weekend in case the Russia-Ukraine situation deteriorates.
Inflation in the US is still in focus as the core PCE reading ticked up from 4.7% to 4.9%. The report is the Fed’s preferred measure of inflation, so that could prompt the Fed to carry out several rate hikes. This morning, the US dollar index hit a fresh 18 month high but has cooled a little, and it’s now fractionally down on the day. AUD/USD tumbled below the $0.7000 mark – a level last seen in July 2020. A sharp fall in industrial metals such as copper dented the Australian dollar. Gold is down 0.5% due to the previous jump in the US dollar, but the declines have been cushioned by the risk-off mood in the markets. WTI and Brent crude have notched up fresh seven-year highs due to political tensions in Eastern Europe.