European recession fears and UK political tension look set to dominate the attention of world markets on Tuesday, with global stocks steadying overnight after Monday’s losses.
Euro zone sovereign debt yields on Monday staged their biggest one-day decline since European Central Bank President Mario Draghi signalled further policy easing in June, after September business surveys showed surprising weakness in the region’s activity readings for this month.
Euro zone stocks underperformed and the euro fell back below $1.10 for the first time in almost two weeks, where it remains first thing this morning.
With equivalent U.S. surveys coming in much stronger, questions abound about the reasons for European corporate angst and whether trade wars, Brexit and higher oil prices are taking a bigger toll on the region and whether further ECB easing is doing anything to improve the mood.
While acknowledging monetary policy alone can’t improve the funk in the economic outlook and fiscal policy would need to step up, Draghi’s testimony to the European Parliament on Monday suggested policy would remain ultra-loose for the foreseeable future and a separate speech from incoming ECB President Christine Lagarde indicated the same.
The widening gap between increasingly positive U.S. economic surprises and increasingly negative euro zone equivalents is now at its highest since June last year.
Germany’s Ifo business survey will be watched closely later in the session, but to the extent that Brexit is one of the big factors affecting sentiment, there’s plenty to chew on from the UK on Tuesday too.
After more than a week of hearings, the UK Supreme Court will rule at 1030 London time today whether UK PM Boris Johnson’s decision to suspend parliament for five weeks before the Oct. 31 Brexit deadline was legal.
A ruling against him would not materially change the market’s Brexit calculus, even if Parliamentary speaker John Bercow then recalls the assembly. But the blow to Johnson may increase pressure on him personally and heighten fears of a snap election.
Meetings between European Union and UK ministers and officials in Brussels and New York, where the U.N. General Assembly takes place this week, gave no indications of any breakthrough on the Irish border backstop, stalling any deal between the two sides.
To add to the confusion, the opposition Labour Party’s annual conference on Monday refused to commit itself to either a leave or remain stance on Brexit before a general election. Instead, it advocated a subsequent referendum, on which its position remains unclear.
Sterling steadied just above $1.24 first thing Tuesday after slipping back against the dollar on Monday. European stocks were indicated higher after small gains in Asia markets overnight and in U.S. stock futures as U.S. officials talked up U.S.-China trade negotiations next month.
In European corporate news, a profit warning from truck and trailer components maker SAF Holland further highlighted the challenges facing the sectors. Its shares were down 14.3% in premarket trade after the German-listed firm said it could no longer achieve its 2020 outlook, citing “continued deterioration in overall economic conditions - particularly in Europe, China and India”.
As repatriations of thousands of tourists continue following the collapse of UK travel group Thomas Cook, more signs of stress among travel companies are emerging, with Slovenia-based Adria Airways saying it would suspend all flights on Tuesday and Wednesday because it lacked "access to fresh cash which the airline needs for further flight operations".
TUI, whose shares have rallied after its top rival collapsed, confirmed its 2019 guidance of a decline of 26% in underlying core profits. Some traders expect TUI shares to fall at the start, highlighting that longer-term challenges remain despite the short-term relief from Thomas Cook’s demise.
In other debt-related woes, troubled British lender Metro Bank said it would not proceed with a bond issue, blaming 'current market conditions'.
— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —