Investors start week on the back foot on global growth concerns and political fragility

<p>Investors started the week on the back foot with heavy losses seen across European stock indices as concerns over global growth continued to dominate investor […]</p>

Investors started the week on the back foot with heavy losses seen across European stock indices as concerns over global growth continued to dominate investor minds. The FTSE 100 opened lower by 2% off Friday’s close whilst the DAX and CAC, closely followed by the Spanish IBEX Index, both saw heavier falls however, losing over 2.5%.

It’s a bad start to the week for the FTSE 100 with concerns about global growth intensifying after PMI data from China, potential downgrades of major UK bank credit ratings to come and the zero non-farm payroll growth still fresh in the memory. That said, weak economic data applies more pressure on the Fed to act in their mid-September FOMC meeting and so this could help to curtail stock falls somewhat.

China data concerns 
Clearly anaemic US jobs data from Friday is still weighing on sentiment but it has been the weakest HSBC PMI report for China on record that has escalated fears of a global economic slowdown. HSBC Chinese PMI fell to 50.6 last month from 53.5 in July, which means that the Chinese service sector grew at its slowest pace on record, albeit the survey has only been in effect for six years.

China has been one of the bright spots in an otherwise anaemic global economic recovery and should that bright spot start to dim, which August’s PMI data may be showing, it is likely to have stronger ramifications for global growth, considering China is the world’s fastest growing economy.

It is the China concerns that are weighing on the commodities and commodity related stock sectors in Europe today. Copper prices have fallen 0.7% whilst crude oil prices have also lost 1.6%, which has contributed to a loss of 3% for the FTSE 3560 mining sector, with stocks such as ENRC and Xstrata weighing on the UK Index.

Bank credit downgrade?
Banking stocks have also lost heavily today, with Barclays, Lloyds and RBS all losing between 4%-7% in early trading, weighed by concerns of the sovereign debt situation, tighter regulation and potential downgrades by Moody’s after the ratings agency said it was ‘poised to downgrade the creditworthiness of some of Britain’s biggest banks and building societies.’ We also have reports that Britain’s banks could be forced to pay out as much as £5 billion worth of damages related to subprime mortgage bonds in the US.

Political fragility in Germany 
Political fragility in Germany is also weighing on European trading sentiment today after Angela Merkel’s Christian Democratic Union lost its fifth state election this year. Antipathy towards the German support for providing liquidity to its debt laden European peers is well known, but the fear is that considering the political momentum against this support is gathering pace, this could weaken Merkel’s resolve to support the euro zone.

The fact that we have the German Constitutional Court announcing its decision regarding the appeals to Germany’s participation in the EFSF tomorrow too, coming off the back of this fresh election defeat, is also triggering more flights of funds to safe haven asset classes in case there is a nasty surprise.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.