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FTSE in the red as eurozone falls into recession

A look at how the major markets are performing on Thursday

European Central Bank President Christine Lagarde addresses the European Parliament's Committee on Economic and Monetary Affairs, at the European Parliament, in Brussels, Belgium June 5, 2023. REUTERS/Yves Herman
European Central Bank President Christine Lagarde: The European economy has been hit by soaring inflation and rising interest rates, as well as Russia's war on Ukraine which has pushed energy and food prices higher. Photo: Yves Herman/Reuters (Yves Herman / reuters)

FTSE 100 and European stocks

The FTSE (^FTSE) tumbled into the red on Thursday, ending the session 0.3% lower to amid news that the eurozone had fallen into a recession, and as the UK jobs market showed fresh signs of cooling.

According to revised data from Eurostat on Thursday, gross domestic product (GDP) across the bloc was revised down to a contraction of 0.1%, downgraded from a previous estimate that the economy stagnated.

It was hit by a combination of soaring inflation and rising interest rates, as household consumption declined, as well as Russia’s war on Ukraine which has pushed energy and food prices higher.

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It follows a decrease of the same amount in the fourth quarter of 2022, meaning the eurozone started the year in recession and shrunk for two quarters in a row – the standard definition of a technical recession.

Watch: What is a recession and how do we spot one?

In Paris, the CAC (^FCHI) rose 0.3% on the day, while the Frankfurt DAX (^GDAXI) managed to climb 0.2% after a rollercoaster day.

Read more: Eurozone sinks into recession

It came as the latest jobs survey from KPMG and REC found that economic uncertainty continued to dampen hiring activity in the UK last month. Recruitment in the hospitality, healthcare and engineering sectors remained strong in May, but demand weakened in construction, IT and retail.

Permanent staff appointments fell for the eighth month in a row.

“UK markets opened in reflective mood, with the interest rate increases from elsewhere providing an unwelcome reminder that the Bank of England is more than likely to follow suit, heaping further pressure on an economy which is already struggling to find meaningful growth," Richard Hunter, head of markets at Interactive Investor, said.

"The gains were marginal in early exchanges, with every possibility of similarly sideways moves until such time as the US inflation number and Fed interest rate decision are revealed next week."

US and Asia markets

Across the pond on Wall Street, the S&P 500 (^GSPC) rose 0.4% by the time of the European close to while the Dow Jones Industrial Average (^DJI) climbed 0.3%, and the Nasdaq Composite (^IXIC) surged 0.9% higher to 13,149.05.

Read more: UK jobs market cools down as starting salaries lose momentum

It came as new data showed weekly US jobless claims rose more than expected to the highest level since October 2021. Initial jobless claims rose by 28,000 to 261,000 in the week ending 3 June, according to the Labour Department, well ahead of economists’ predictions of 235,000.

US companies announced more layoffs in the first five months of 2023 than in all of last year.

Meanwhile, Asian shares were mixed overnight after a sell-off of popular tech stocks pushed benchmarks lower on Wall Street.

Japan’s benchmark Nikkei 225 (^N225) sank 0.9% to 31,641.27, while Hong Kong’s Hang Seng (^HSI) gained 0.1% to 19,277.78. The Shanghai Composite (000001.SS) rose 0.5% to 3,213.59.

Read more: Crypto crackdown: UK follows US lead with new rules and regulations

Treasury yields rose after the Bank of Canada raised borrowing costs for the first time since January. This followed an increase earlier in the week in Australia and comes ahead of a decision on interest rates next week by the Federal Reserve.

The benchmark yield on the 10-year Treasury rose to 3.78% from 3.68% late Tuesday.

Madhavi Arora, lead economist for Emkay Global Financial Services, said: “Clearly we are not near the terminal rate as far as the western world is concerned. There is a risk you may see further increases by the US Fed.”

Pound

The pound (GBPUSD=X) picked up against the US dollar, climbing 0.15% to 1.2458, as traders weighed up the possibility of another rate hike by the US Federal Reserve. Against the euro, sterling (GBPEUR=X) was trading almost 0.1% lower at 1.1614.

“We have trend line resistance from the 2021 highs at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area,” Michael Hewson, chief market analyst at CMC Markets UK, said.

Commodities

US crude oil, or West Texas Intermediate (CL=F), gained 0.8% to trade at $73.09 (£58.47) a barrel, while Brent crude (BZ=F) gained 0.7% to $77.47.

Economic data

The Royal Institution of Chartered Surveyors (RICS) has warned that expectations of further interest rate rises from the Bank of England may put fresh downward pressure on the housing market in the coming months.

According to its UK residential market survey, new buyers enquiries and agreed sales had their least negative readings in 12 months. The net headline balance for new buyer enquiries came in at -18% in May. Although this indicates a subdued trend in demand, the latest reading is up from a net balance of -34% in April.

Read more: What next for property stocks amid signs of market strain?

“It seems storm clouds are gathered, with the UK's stubbornly high inflation likely undermining the recent improvement in activity by prompting the Bank of England to take further action through interest rate rises, leading to higher mortgage rates and ultimately reducing affordability and buyer demand,” RICS senior economist, Tarrant Parsons, said.

“The banking sector appears to expect this with many banks and building societies already introducing products with higher interest rates.”

It comes as housebuilder Crest Nicholson (CRST.L) has reported a fall in revenues in the six months to 30 April to £282.7m, down from £364m a year before. Adjusted pre-tax profits more than halved to £20.9m, from £52.5m. Shares in the company slumped 9% in London on the back of the news.

Watch: How much money do I need to buy a house?

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