Stocks fall as risk-off returns

Summary:

• FTSE falls below 7200 as equities slump

• Surprise rise in German unemployment

• Investors see two Fed rate cuts this year

There’s been some notable selling in stock markets this morning with European bourses trading firmly lower and US futures are pointing to a red open on Wall Street with some disappointing employment data from Germany and fading hopes of a US-China trade deal at next month’s G20 summit weighing on risk appetite. The FTSE has fallen by 80 points to trade back below the 7200 and at its lowest level in 2 weeks. Elsewhere, the pound continues to trade near its recent lows despite House of Commons speaker John Bercow warning Brexiteers that a no-deal will be blocked by parliament.

The FTSE has dropped to a 2-week low this morning with the market carving out a potential head and shoulders formation. Source: xStation

Weak data from Germany

Despite a stellar start to the year there remains a feeling that all is not well for stock markets, with concerns surrounding the health of the global economy remaining in place as trade tensions between the world’s two largest economies have ramped up further. After a string of disappointing manufacturing surveys from Germany we’re now starting to see some weakness in the hard date with the unemployment rate rising for the first time in over 5 years in April. The monthly unemployment change for the month showed a massive jump to 60k - the first such rise in two years - and while this could be explained away to some extent by a statistical reclassification it is another potential alarm bell.

Fed rate cut expectations rise further

On the trade front there’s little by the way of fresh negative developments, but these aren’t necessarily required for a further pullback in stocks, with the markets remaining remarkably optimistic that a de-escalation will occur despite scant evidence to support this. One of the most widely cited reasons for the rally year-to-date has been the U-turn performed by the Fed with the central bank changing course and investors now expecting that rates will be cut not once, but twice this year. This is an extremely dovish view considering that the central bank haven’t cut in over a decade and while US economic data has softened, it is still holding up fairly well with inflation not far from the Fed’s target. With the yield curve inverting further the warning signs are clear, and the big worry for stock market bulls is that the so-called “Powell Put” will not manifest itself as readily as it did with his predecessors.