European unrest leads to market volatility

For a change, nobody can blame the US Federal Reserve for today’s risk-off mode in equity markets.

Political upheaval in Egypt and an austerity backlash in the Portuguese government – both of which threaten to re-ignite the eurozone crisis – have lead to a strongly negative sentiment today. It seems that for now we should accept a summer of market volatility.

European markets

It is perhaps the fact that the FTSE is not a reflection of the underlying UK economy that has seen the index drop and test the 6200 level for the first time in six days, and no sector is escaping the sell-off. The mining sector has once again been shoved into submission with Anglo American shaving off 5.5% and Evraz also bearing the brunt, losing 4.5%.

Tullow Oil, helped by the stronger oil prices and a fairly decent first half trading update, has retained the top spot on the index today, and the share price gained 2.27%.

The UK economy was boosted, however, in the form of the critical services output again, which beat expectations of 54.6 by coming in at 56.9. This likely negates, or at the very least puts on hold, the prospect of additional quantitative easing from the Bank of England.

Overall European services remain in severe contraction mode, which has only added to the fray and helped to reinforce the new buzz expression that is ‘austerity fatigue’. The 7% yield used to mark the difference between sustainable and unsustainable debt servicing is strongly reminiscent to summer 2011, and we are now seeing Portuguese ten-year bond yields soar through the 8% mark.

US markets

The main US bourses all opened lower on what was quite a data-heavy day for the US. ADP non-farm employment saw 188,000 jobs added against the consensus 161,000. The ISM non- manufacturing survey was a disappointment, with new orders seeing the biggest slump since the collapse of Lehman Brothers.

These figures may well indicate that the growth seen in the US is faltering and that the recent GDP data for Q1 of 1.8% is not historical. Barclays has now slashed its US Q2 GDP estimate to 1%, down from 1.6%, following the miss on the US trade deficit data in May. One could probably expect to see other investment banks follow suit with downward revisions.

Owing to Independence Day, tomorrow will be a short trading day in the US. The mass exodus of the hedge funds to the Hamptons, along with fairly weak volumes, could conspire to send equity markets even lower ahead of Friday’s payrolls number.

The Dow is currently trading down 12 points at 14,920.


The West Texas Intermediate (WTI) oil price rose to highs not seen since May 2012 today, and the spread between the Oil - Brent Crude price and WTI narrowed further after yesterday’s two-and-a-half year low. The spread is now less than $4.

Egypt, while not an exporter of oil, bears close proximity to the Suez Canal, and this, along with the ongoing civil war in Syria, is raising concerns about the spreading of instability to oil-producing nations.

The report from the Energy Information Administration today, which showed a fall in inventories of 10.3m barrels, is likely to help cement the case for higher oil prices in the medium term.


Whatever the lack of systemic risks posed by the new problems in Portugal, it would appear now that the euro is weathering the storm almost too well, remaining as it does above the $1.30 level against the dollar. There is perhaps a misplaced optimism that Mario Draghi will step into the breach at the European Central Bank (ECB) press conference on Thursday. Given that the president of the ECB has stipulated on numerous occasions that he pays little attention to the forex market, one can only suppose that he will trot out the usual rhetoric that the ECB cannot do everything even with the projected implementation of the OMT programme. Should we see continued weakness in equity markets, this may translate into a capital flow to the greenback, and will place the downside bias firmly on the single currency.

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