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LGT Navigator: Nervousness and volatility shape stock market sentiment

July 6, 2022

Nerves are wearing thin on the stock markets and fears of recession and inflation have a firm grip on investor sentiment. In Europe in particular, indications of an economic downturn are intensifying against the backdrop of an energy crisis resulting from the conflict with Russia. Volatility and nervousness are thus not only increasing on the stock markets but are also intensifying on the bond and foreign exchange markets.

Nervousness and volatility shape stock market sentiment

In New York, the stock indices started with a rollercoaster ride after the holiday-long weekend. The Dow Jones Industrial closed -0.42% lower at 30,967.82 points after volatile trading. The broad S&P 500, however, still saved in positive territory and ended Tuesday at 3,831.39 points, +0.16% higher. On the Nasdaq, the indices could, after the heavy losses in the previous week, catch up and gained about +1.7%. However, the stock market sentiment remains depressed and the outlook for an imminent renewed interest rate hike by the Fed and the fear of a recession characterize the trade. A positive impetus provided détente signals between the US and China. The withdrawal of some trade tariffs, which had been introduced under US President Donald Trump, is to be considered.

On the bond market, the nervousness also remains noticeable. At times yesterday, a reversal of the yield curve could be observed, i.e. the yield on two-year US government bonds traded higher than their longer (5-10 years) maturity counterparts. The reversals suggest that investors expect higher short-term interest rates, but at the longer end see the possibility that the Fed will not be able to control inflation without plunging the economy into recession. In this context, the minutes of the Fed's latest interest rate decision, the FOMC minutes, are eagerly awaited tonight at 20:00 (CET).

In Asia, losses were observed for the most part in the middle of the week. In Hong Kong, the Hang Seng fell by about -1.8% and in Tokyo, the Nikkei 225 trades about -1% lower.

Corporate sentiment in the euro area deteriorates further

The purchasing managers' index (PMI) for the private sector in eurozone countries deteriorated further in June to the lowest level since March 2021. S&P Global's PMI Composite fell from 54.8 to 52.0 points, just above the consensus of 51.9 points. S&P Global Chief Economist Chris Williamson commented, “The sharp slowdown increases the risk that the euro economy will slip into a downturn as early as the third quarter of 2022.”

In contrast, business sentiment in the UK improved slightly in June. The Purchasing Managers' Index for the service and industrial sectors rose by 0.6 points to 53.7. However, only service providers assessed the economic situation as better than a month earlier, whereas sentiment in British industry deteriorated.

Euro under pressure – Swiss franc breaks parity

In the first half of the week, the euro slipped to 1.0280 against the US dollar, its lowest level in almost 20 years. The single currency was also unable to maintain parity against the Swiss franc and fell in places to 0.9925 – the lowest level since the Swiss National Bank (SNB) abandoned its minimum exchange rate in 2015. In addition to increasingly gloomy economic data from the euro area, the euro is also being weighed down by the ECB's hesitant stance compared with the US Federal Reserve. In addition, Europe is much more affected by the war in Ukraine and the consequences for energy supplies.

Economic Indicators July 6

MEZ Country Indicator Last period
08:00 GE Industrial Orders (May, m/m) -2.7%
11:00 EZ EU Economic Forecasts
11:00 EZ Retail Sales (May, m/m) -1.3%
15:45 US PMI Composite (June) 51.2
16:00 US ISM PMI Non-Manufacturing (June) 55.9
20:00 US FOMC Minutes


Earnings Calender July 12

Country Company Period
US Pepsico Q2


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