European Markets, Fundamentals

European Stocks Plummet as US Unemployment Data Dampens Recovery Outlook

rope Session Key Developments

•    ECB Holds Rates at 1.00%
•    US Unemployment Sinks to Lowest Level Since 1983
•    Indicators Show Moderating Deterioration

European Markets started the month strong with roughly a two percent rally, but saw those gains erased after pessimistic data from the United States softened hopes for a recovery in the near-term. Indicators from the UK and the EZ indicate a moderating of the recession. UK Construction PMI disappointed with a reading of 44.5, less than the 46.0 expected, suggesting that the housing market will remain in a state of flux. Euro-Zone PPI from the month previous declined 0.2%, abating inflationary fears ahead of the ECB Rate Decision. ECB President Trichet announced that while rates will remain at 1.00% in the short-term, they may not have reached their “lowest” yet, though the economy is likely to recover during the 2nd and 3rd quarters of 2010. The usually vigilant Trichet noted, “We are, as far as growth is concerned, around the inflection point in the cycle.” A flight to safety ensued toward the end of European session trading hours, with the EURJPY losing as many as 194 pips from the release of US unemployment data to the session close. Looking ahead, Euro-Zone retail sales data for May is expected to have declined by 2.7% from the year previous, adding more downward pressure to the Euro.

FTSE 100                      4234.27                   -106.44               -2.45%
Trading in the British market led to a decrease of almost two and a half percent as the Basic Materials sector sank by nearly five percent. Mining companies Anglo American and Rio Tinto led the decline, dropping 5.81 and 5.70 percent respectively. Several other firms faced downside pressure, with WPP, a communications services group, led the overall decline for the index by dropping 7.01 percent. The London Stock Exchange group dragged down the Financial sector by 5.48%. The Consumer Goods sector decline the least, only 0.87%, after Diageo posted a 0.89% gain. The Housing sector remains a concern after PMI Construction data declined; BoE’s Miles says that the effect of the home price drop on the UK economy remains unclear.

CAC 40                     3116.41                   -100.59                 -3.13%
Trading in the French market led to the second largest decline in the Euro session, pulling the market back from moving into positive territory for the year. All sectors were hit hard, with Basic Materials posting the widest margin of losses at 4.22%. ArcelorMittal announced that it would be raising its prices by three to four percent in August, leading to a 4.76% drop. All securities dropped, with the Telecommunications and Consumer Sectors posting the smallest declines. Accor dropped only 0.60% despite having its rating downgraded by Fitch to ‘BBB-/F3’.

DAX                         4718.49                    -186.95             -3.81%
German equities declined the most of any Euro session market, dropping nearly four percent during trading hours. Consumer Goods and Industrials took the brunt of the fall, dropping 5.36 and 4.96 percent respectively. Leading the retracement was Volkswagen, dropping 7.80 percent amid news that German car production is likely to fall more than 17 percent, and worldwide car production falling to 8.6 million cars from 11 million cars from the year previous. Technology and Health Care were the only two sectors to not drop more than two percent on the day. The only security to gain on the day was Frensius Medical Care, a day after the company announced a distribution pact with Advanced Renal.

IBEX 35                     9643.50                   -260.20                -2.63%
The Spanish market dropped over two and a half percent on the day but remains the only major European index to remain positive on the year at 4.87% gains thus far. Seven of the nine sectors retraced on the day, with Financials posting the largest loss of 3.40%. Surprisingly, the biggest gainer on the day came from Industrials, where Sacyr Vallehermoso, a construction company, remains optimistic after receiving an approval from the European Union to have a stake in Atlantia’s Chile highways.

S&P/MIB                        18928.66                    -514.52                  -2.65%

Trading in the Italian exchange led to a close down of more than two and a half percent with general declines across the board. Overall, the index had seen a sharp rally since March, but has pulled back to current levels 2.73% below the start of the year.

-Written by Christopher Vecchio, CFDTrading Research
Please send any comments about this report to Cvecchio@fxcm.com