Europe heads lower in risk-off trade, FTSE out-performs

Risk-off sentiment is dominating the markets at the start of the week. Weaker-than-expected China data is overshadowing signs of economic recovery in Europe, while US markets are set to remain closed in observance of the Independence Day public holiday.

The China Caixin services PMI revealed the sector grew at its slowest pace in 14 months in June. The PMI printed at 50.3, well down from 55.1 in May and far from the expected 55.7. The weak print comes following Thursday’s manufacturing equivalent, which also revealed that growth was slowing.

The latest PMI data from China reveals economic recovery from Covid in the world’s second-largest economy is starting to wane. This was in stark contrast to the Eurozone PMI reading. The composite PMI gauge for the Eurozone revealed that business activity soared in June as lockdown restrictions in the region were lifted.

The final composite PMI for June came in at 59.5, ahead of the flash print of 59.2 and well ahead of May’s 57.1. Eurozone business activity expanded at the fastest pace in 15 years as more Covid restrictions were eased following the third wave and as the dominant service sector fired back into life.

Europe’s recovery is really starting to ramp up. However, inflationary pressures are also on the rise, which is keeping investors a little nervous. Inflationary pressures are picking up amid supply-chain disruptions and labour shortages.

The FTSE is outperforming its European peers, boosted by the supermarkets after Morrisons accepted a bid from US fund Fortress, although other interested parties are still circling. Under the UK market rules, potential bidders have until 17 July to make an approach. With at least two other parties interested, the chances of this turning into a bidding war have risen sharply.

US markets will remain closed today for the extended Fourth of July weekend.

FX – GBP rises on reopening hopes and PMI data

The pound is putting in a solid performance, retaking 1.3850 amid reopening optimism and better-than-expected PMI data. The UK appears to be well on track for final Covid restrictions to be eased on 19 July, even as cases remain elevated. Deaths have remained low, indicating the vaccine has broken the link between cases and deaths.

Meanwhile, data revealed that business activity is surging for UK services firms as the post-Covid bounceback continued in June. The services PMI edged lower to 62.4 in June, down from 62.9 but still well above the 61.7 initial reading. Job creation rose at the fastest clip in seven years, boding well for the UK economy when furlough restrictions are eased in Autumn.

For a look at all of today’s economic events, please check out our economic calendar at www.marketpulse.com/economic-events/

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Sophie Griffiths
Sophie Griffiths is a market analyst with OANDA, focusing on the UK and Europe. With almost 15 years of experience, she brings with her a deep-seated understanding of the financial markets, providing timely and relevant fundamental analysis across a broad range of asset classes.