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Market Report: summer euphoria fizzles out and economic problems mount for France and Germany

Written by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

The summer party in the equity markets seems to be coming to an abrupt end as hard-line central bank policymakers hover as unwelcome guests, reminding revellers than inflation still remains a big risk.

The pull-back has accelerated as worries ratchet up again about the spiral in consumer prices and indications that it doesn’t look like there will be an immediate let-up in the hiking of interest rates. Nervousness is set to linger ahead of the key Jackson Hole meeting, as investors wait for Fed Chair Jerome Powell to illuminate a the path ahead for monetary policy.

The S&P 500 plunged by 2.14%, its worst day in two months with tech and consumer discretionary stocks the worst hit. The NASDAQ fell by 2.5% as risk aversion seeped in and the negative sentiment has spilled over into Asia with the Nikkei also down by more than 1.2%.

Problems are mounting for the French and German economies, as a fresh snapshot of business activity shows demand has fallen due to the toxic combination of rampant inflation, rising interest rates and energy security worries. S&P Global’s flash composite Purchasing Managers’ Index (PMI), tracks the mighty manufacturing and services sectors and shows that the French economy shrank in August for the first time in a year and a half, falling to 49.8, with a reading below 50 indicating a contraction. In Germany there was another dismal reading for a second month in a row, with flash PMI number coming in at 47.6 for August.

Although it didn’t come in quite a low as some forecasts, and the manufacturing sector improved a little, it highlights the underlying weakness in Germany, Europe’s largest economy. Investors seem to have grasped onto data which indicates some easing of supply snarl ups and input cost inflation, given that the DAX turned positive on the news. But uncertainty reigns about the outlook ahead particularly as it’s feared the energy crunch that countries are currently facing could become even worse. Worries have risen after fresh maintenance work on the Nordstream pipeline was announced which will stop flows from Russia for three days. That’s sent the price of natural gas rocketing to fresh record highs. Natural gas futures linked to TTF, Europe’s wholesale gas price, jumped to above €285 per megawatt hour, 27% above the level gas prices reached soon after Russia’s invasion of Ukraine.

The FTSE 100 and FTSE 250 have opened lower as fresh alarm bells have begun ringing over the fragility of the UK economy. It follows the frightening forecast that inflation could peak at 18% in the UK driven by sky high energy bills. Already shoppers are struggling amid a whirlwind of price increases and anxiety is rising about their resilience in the months to come. With so many consumers tightening their belts and limiting discretionary purchases, it’s set to hit margins particularly if retailers are forced to into mass discounting to shift stock. A closely watched snapshot of the manufacturing and services sector, the snap PMI reading, is expected to show that resilience may be waning in the face of a worsening economic outlook.

There is little help in the way of consistently lower oil prices so far, with a barrel of Brent Crude rising back above $97 dollars a barrel. Words from the OPEC+ hold huge sway over the oil price, with a warning from Saudi Arabia that the oil cartel could reduce output in reaction to any sharp drop in the commodity. Threats of production cuts are likely to add to the volatility we’ve seen in prices, and will hamper relief for motorists at the pumps.

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