European stocks slide as risk aversion returns

June 1, 2016

European markets have got off to a slow start in June as investors absorb the latest manufacturing reports from around the globe. Lacklustre manufacturing PMI reports from Japan and China prompted a disappointing Asia session with the Nikkei sliding sharply despite confirmation that PM Abe had decided to defer his long expected sales tax rise into late 2019.

While it has been widely argued that the implementation of the rise would send the economy into recession, the delay also speaks to a wider problem with respect to the Japanese economy. If a 2% rise to 10% has the capacity to knock the economy so badly when the tax is half the UK rate, then it doesn’t speak well to the management of an economy whose Prime Minister who has had three years to implement the structural reforms he now claims he will need to implement between now and 2019.

In Europe the picture for manufacturing isn’t much better with France still struggling and Spain and Italy showing signs of slowing down, though German manufacturing did manage to post a four month high.

UK manufacturing managed to recover from its drop into contraction in April by coming in at 50.1 in May, up from 49.4 in April.

As if to reinforce concerns about the weaker global outlook the OECD kept its outlook for global growth at 3% while also warning about the impact a “Brexit” vote would have on the UK economy slashing its GDP estimate to 1.7% from 2.1% three months ago.  They also downgraded US GDP growth forecast to 1.8% from 2%, but upgraded EU growth to 1.6% from 1.4%.

This OECD downgrade shouldn’t come as too much of a surprise given the 0.4% rise seen in Q1 and the weak start to Q2, it merely brings the estimate in line with recent data.

The OECD reserved its harshest criticism for politicians all over the world for not acting in a manner that would help aid the business environment and encourage investment, urging politicians to enact vital structural reforms by way of fiscal policy to help in this process.

Lower commodity prices are also acting as a minor drag on the basic resource sector with copper prices slipping back along with oil prices.

On the companies front heating and plumbing distributor Wolseley has slid back after reporting an increase in its restructuring costs as it looks to deal with changes in trading conditions in its UK and European markets, which saw revenue declines in both.

The chain came off Halfords shares this morning after the company reported that pre-tax profits fell 1.2% to £80m. If the recent acquisition of on line cycle competitors Wheelies Direct and Tredz was designed to reinforce its position in the cycling market, then it would appear that the jury remains out. The company’s repair services did manage to perform well with 2.5% growth in its garage and parts unit.

In the US the main focus is likely to be on today’s ISM Manufacturing survey for May given the weak manufacturing numbers seen from the various Fed regions. Philadelphia, Empire Fed, Dallas Fed and Chicago PMI have all shown sharp falls so it would be surprising if today’s ISM survey wasn’t similarly weak. Expectations are for a reading of 50.3 from 50.8, but it would not be a surprise to see a move below 50.

On the companies front athletics apparel brand Under Armour slipped back in after-hours trading on reports that it would be taking an impairment charge of $23m.

Office supplies retailer Staples also announced that its CEO would be stepping down in June, causing the shares to edge higher.

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