Daily Wrap Up 31 May 2022

31 May 2022 04:33 PM

Euro slides amid inflation and growth fears

Stock markets are in the red as yesterday’s bullish sentiment has been replaced by worries about rising inflation, and lofty oil prices. US stocks resumed trading as the New York Stock Exchange was closed yesterday for Memorial Day. Even though stocks enjoyed a bullish run last week, the old concerns about rising inflation have resurfaced considering the news that CPI hit a record high in the euro area. The DAX, the CAC and the FTSE MIB are all down over 1% as fears have gripped the region. Over in the US, the 10-year yield has edged up to 2.87%, which is applying pressure to the S&P 500.

WTI and Brent crude have hit their highest marks since early March as supply fears have ticked up a notch as the EU is getting closer to finalising a ban on imports of oil from Russia. This comes at a time when OPEC have not been in a rush to ramp up output, so even though there are fears of global demand waning in the months ahead, supply issues are propping up energy prices.

In recent weeks there has been several hints from European Central Bank policymakers that rates will be hiked in summer. Now that CPI in the currency bloc increased to 8.1% - a new record high – it seems more likely the ECB will lift rates. The euro has been rallying recently due to the growing speculation the central bank will hike rates, but despite the increase in inflation, the single currency is in the red. The bloc is slowly moving towards unveiling a plan to ban Russian oil imports, and such a move would impact the continent – the Bank of Spain predicts such an embargo could dent EU GDP by 2.5%-4.1%, and therefore the euro is in the red. Also weighing on the euro is the “buy the rumour fell that fact” mentality, whereby the currency rallied ahead of the closely watched inflation data, and then pulled back on confirmation the reading was high.

Last week, the minutes from the Federal Reserve meeting indicated the bank are not going to be overly aggressive in respect to hiking rates as initially predicted, and that resulted in a large fall in the dollar – yesterday the US dollar index dropped to a five-week low. Short covering and bargain hunters have propped up the dollar. Now the dust has settled in relation to the Fed minutes, it is possible the recent bout of selling was over overdone, and now we are witnessing a rebound.

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