European indices under pressure as oil prices hit 2.5-year high, German factory orders dive

Surging oil prices are not good news for the global economic recovery. European bourses are trading under pressure as rising oil prices hit sentiment. The markets are already nervous about rising inflationary pressures. Surging oil prices will only add to these concerns.

The surge in prices is good news for the oil sector, however. The FTSE is outperforming its European peers as heavyweight oil majors lend their support.

Covid headlines are also underpinning the UK index. Prime Minister Boris Johnson outlined plans to end the final Covid restrictions in two weeks, boosting sentiment, even though new daily Covid cases toped 24,000. The more domestically-focused FTSE250 hit an all-time high in the previous session on reopening optimism. Travel stocks are in favour after Germany announced it will allow entry to fully-vaccinated British tourists without quarantine. British Airways owner AIG topped the FTSE leader board.

The Dax is a notable underperformer as data reveals mounting supply problems in German factories. German factory orders unexpectedly fell -3.7% MoM in May, down from -0.2% in April and well below expectations of a 5% rebound. The unexpected decline in factory orders marks the steepest since the first lockdown and highlights the uneven nature of the global economic recovery as supply-chain issues persist.

Looking ahead, the US is pointing to a mixed start as traders come back to their desks after the extended  Fourth of July break. Attention will be firmly on ISM non-manufacturing PMI data, which is expected to show a slight easing in activity. That said, the employment sub-component is expected to reveal another firm rise in headcount.


FX – Aussie dollar rallies, euro takes a hi

The Aussie dollar is surging higher after the Reserve Bank of Australia kept interest rates on hold at 0.1%, as expected, but fired the gun on reining in its QE programme. The central bank announced it would reduce QE purchases by AUD5 million per week. Unsurprisingly, the move to tighten policy was met with a cheer from investors, and the Aussie dollar rallied hard, building on already strong gains so far this month. Despite today’s move, the RBA outlook remains dovish, with no rate rise expected until 2024.

At the other end of the spectrum, the euro was trading under pressure, weighed down by disappointing data from Germany. German factory orders unexpectedly tumbled in May as supply bottlenecks continue to hamper the sector. Meanwhile, ZEW economic sentiment in Germany, Europe’s largest economy, declined by more than forecast. Economic sentiment dropped to 63.3 in July, well down from 79.8 in June and significantly lower than the 75.4 forecast.

The EUR/USD continues to struggle below 1.1850 amid a growing divergence in outlook and, more precisely, the central bank monetary policy outlook for the two regions.


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