LDN - Business

Weaker German, French data compound energy and euro woes

[August 23, 2022] By Huw Jones

LONDON (Reuters) - Weakening economies in Germany and France piled more pressure on markets on Tuesday as decades-high inflation and surging gas prices drag Europe towards recession, pushing the euro to a 20-year low against the dollar.

The S&P flash composite Purchasing Managers' Index (PMI), which tracks manufacturing and services, showed that a downturn in Germany, Europe's biggest economy, deepened in August due to high inflation and rising interest rates.

The PMI data also showed that the French economy contracted in August for the first time in 18 months.

"The PMIs are going to feed into the pessimistic narrative," said Michael Hewson, chief markets analyst at CMC Markets.

The MSCI global stock index was down 0.2%.

The STOXX index of European company shares was flat as rising U.S. stock index futures helped to counter the gloomy economic news. The index has fallen for nearly a week, leaving it about 11% off its record high of January 4.

"I can't see the Ukraine war coming to an end anytime soon, that would be the catalyst for a market rally. That is going to keep pressure on energy prices and as for the euro, the only way is down," Hewson said.

Benchmark gas prices in the European Union surged 13% overnight to a record peak, having doubled in just a month to be 14 times higher than the average of the past decade. [NG/EU]

Europe was braced for fresh disruption in energy supplies from Russia.

Markets had begun to recover on bets the U.S. Federal Reserve would 'pivot' next year away from its rate rising path.

But markets now expect the Fed will remain hawkish when its chair Jerome Powell addresses the annual Jackson Hole meeting of global central bankers on Friday, ING bank said.

At last year's meeting, central bankers wrong-footed investors by predicting that inflation would be a temporary blip, but price rises have been higher, longer-lasting and more broad-based, said Monica Defend, head of Amundi Institute.

Markets are betting on the Fed raising rates by 75 basis points next month, when the European Central Bank and Bank of England are also expected to increase their benchmark rates.

Defend said that while company earnings have showed some reslience, margins would come under pressure later this year.

The euro, trading at 98.9 versus the dollar, is expected to fall further to 96 by December given Europe's poorer outlook, Defend said.

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A man holding an umbrella is silhouetted as he walks in front of an electric monitor displaying the Japanese yen exchange rate against the U.S. dollar and Nikkei share average in Tokyo, Japan July 14, 2022 REUTERS/Issei Kato

"The U.S. and the euro area are on two different tracks," she said.

S&P 500 futures and Nasdaq futures were both firmer, putting a floor under European shares for now.[.N]

STERLING NOSE DIVES

Sterling was down at $1.1755, after diving as deep as $1.1743 and levels last seen in March 2020 at the start of the pandemic. That saw the dollar index up to 109.100 and within a whisker of its July peak.

Asian shares were down for a seventh straight session on Tuesday after a renewed spike in European energy prices stoked fears of recession and pushed bond yields higher, while tipping the euro to 20-year lows.

Unease over China's economy continued to percolate as a cut in lending rates and talk of a fresh round of official loans to property developers underlined stresses in the sector.

"Growth in the services sector seems unlikely to accelerate by much so long as China's zero-COVID policies remain in place; the pandemic-linked export boom is coming to an end; and power shortages due to droughts in parts of the country look set to hobble industry in the near term," said Oliver Allen a market economist at Capital Economics.

Chinese blue chips were off 0.5%, while the yuan fell to an almost two-year low. [CNY/]

The Nikkei lost 1.2% after a PMI survey showed factory activity in Japan slowed to a 19-month low in August.

Ten-year yields were last trading at 3.00%, up almost 50 basis points from the lows of early August. [US/]

The ascent of the dollar and yields has been a drag for gold, which was hovering at $1,739 an ounce after hitting a three-week low overnight. [GOL/]

Oil prices gained as Saudi Arabia warned that the OPEC+ producer alliance could cut output. [O/R]

Brent was up 0.8% at $97.29, while U.S. crude rose 1% to $91.30 per barrel.

(Reporting by Huw Jones and Wayne Cole; Editing by Kenneth Maxwell, Jacqueline Wong and Mk Harrison)

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