Markets fall amid strong US services sector data

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

US equities fell to start off the new week amid some economic data, even as China took further measures to ease Covid restrictions. The global markets digested a host of November services sector reports which suggested that activity around the globe is mostly slowing, but US output surprisingly accelerated. The data seemed to foster uncertainty regarding how aggressive the Fed may be next week with its monetary policy decision. By the end of the session, the Dow Jones lost 1.4%, the S&P 500 fell 1.8%, and the Nasdaq Composite dropped 1.9%. European markets also closed lower on Monday, with the benchmark Euro Stoxx 50 down 0.5%, dragged by weak economic data. 

Summary

• Asian equity markets were mixed on Tuesday following the overnight selloff on Wall Street, but signs of further reopening in China buoyed mainland shares. Australian equities also declined as the Reserve Bank of Australia (RBA) raised its policy rate by 25 basis points to 3.1%, taking borrowing costs to a level not seen in a decade. 
• European equities are tipped to follow global shares lower while US equity futures held steady after the sharp selloff overnight. 
• Oil prices edged higher on Tuesday after a G7 price cap on Russian seaborne oil came into force on Monday on top of a European Union embargo on imports of Russian crude by sea. Meanwhile, India announced it will prioritise its own energy needs and continue to buy oil from Russia. 
• Australia raised the cash rate by 25 bps this morning, marking the eighth straight hike and taking borrowing costs to a level not seen since November 2022. The RBA expects inflation in Australia to peak around 8% this year before easing in 2023 and reaching a little above 3% in 2024. 
• The Institute of Supply Management (ISM) Services Index for November in the US showed an unexpected acceleration in growth for the key services sector. The index increased to 56.5, compared to the consensus estimate of a decline to 53.5 from October’s 54.4 reading. The ISM showed that supplier deliveries continued to improve due to increased capacity and shorter lead times that led to improved supply chain and logistics performance. 
• November Services PMIs out of the Eurozone and the UK released on Monday both showed that output contracted while Eurozone retail sales for October fell more than anticipated. Moreover, Eurozone December investor confidence improved more than expected but remained solidly in negative territory. 
• Retail sales data released in the UK this morning showed a jump of 4.1% on a like-for-like basis in November from a year ago, accelerating from October’s 1.2% rise due to winter-related purchases and the Black Friday boost. November’s figure was also the highest since January but less than half the pace of UK inflation, which surged to a four-decade high of 11.1% in October. 
• Germany plans to purchase 35 of Lockheed Martin’s F-35A Lightning II fighter jets for €10 billion. The purchase deal is part of Chancellor Olaf Scholz’s promise to increase government spending on defence following Russia’s invasion of Ukraine. The order will include air-to-ground missiles and ground infrastructure. Deliveries are expected from 2026 to 2029.  
• Porsche will join the blue-chip index, just over two months after its market debut, replacing Puma on the DAX stock index on 19^th December.