European Central Bank Guides Lower
Last week, President of the European Central Bank (ECB) Mario Draghi surprised markets by suggesting that interest rates in Europe may be cut in the near future. Even though rates in the Eurozone already stand at -0.4%, it is now anticipated that they will be cut to -0.5%, with an expansion in quantitative easing also on the cards. The deteriorating economic performance in the Eurozone and lacklustre inflation have emboldened the ECB to take action. However, it is debatable how much impact such a change will have given the already incredibly loose state of monetary policy. Nevertheless, investors took the news as positive with both equity and bond markets rallying on the announcement. The lower expectations for future interest rates mean that German government bond yields are once again at record lows, with the 10-year Bund trading with a negative 0.31% yield to maturity.
Iran Shoots Down US Drone
Oil prices reacted on Thursday as news that Iran had shot down a US military drone hit markets. The news comes a week after two oil tankers were attacked and additional US troops were moved into the region. The US drone was shot down in international airspace over the Strait of Hormuz, one of the world’s most critical shipping routes. While there has not been a retaliation from the US, investors are concerned that an escalation in violence could lead to a disruption of oil supply. A spike in the oil price could lead to a sharp rise in inflation globally and potentially cause a recession.
UK Retail Sales
Having grown unusually quickly in the first quarter, retail sales have returned to a more natural level in May, with an annual growth rate of 2.3%, down from a peak of 6.7% in March. The figures in May were impacted by a 4.5% month-on-month fall in clothing sales caused unusual weather patterns. Furthermore, the poor weather in June means that an immediate rebound seems unlikely. Department stores continued to be impacted, with total sales falling for the eighth consecutive month. While weak clothing sales were a drag on online demand, as a proportion of the total online still accounted for 19.3%, up from 18.2% last year. Although the outlook for consumer spending in the short term is not strong, growing real wages and high levels of employment mean that retail sales may improve in the medium term.
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