Financial Markets’ Weekly Recap

European stocks closed on a weak note on Friday as weaker-than-expected US inflation data offset losses in sportswear makers and stocks exposed to China, just ahead of the Christmas holiday.

The European STOXX 600 index edged up by 0.1 percent, marking gains for the sixth consecutive week in a streak not seen since December 2022. However, trading volumes were lower than usual as traders prepared to take a break with the onset of the holiday season. European markets will remain closed next Monday for Christmas.

Investors found relief in data indicating a decline in US prices in November, the first such decline in over three and a half years. This pushed the annual increase in inflation to below three percent, supporting financial market expectations of the Federal Reserve’s decision to potentially lower interest rates in March.

Traders are also speculating that the European Central Bank will cut interest rates early next year, despite policymakers’ efforts to manage those expectations.

Additionally, the ripple effect of Chinese regulators implementing rules to limit spending on video games was observed in global markets. Shares of Dutch technology company Prosus, which owns a stake in Chinese gaming company Tencent, experienced a 13.4 percent decline, marking the largest percentage drop in a single day in over a year.

Sportswear companies weighed on European stocks after US giant Nike lowered its annual sales forecast, attributing it largely to cautious consumer spending.

Eurozone data revealed a slight slowdown in Spain’s GDP growth in the third quarter, while another dataset indicated a 10.2 percent decline in residential property prices in Germany during the same period, presenting another negative sign for the real estate sector.

On Friday, data revealed that Britain’s GDP contracted from July to September, raising concerns that the economy might have entered a recession. The Office for National Statistics reported a 0.1 percent contraction in gross domestic product (GDP) for the third quarter.

The initial estimate had indicated that the economy would remain unchanged compared to the previous three months. Most economists polled by Reuters had anticipated an unchanged reading.

The Office for National Statistics revised its estimate for the second quarter, stating that GDP did not achieve any growth, marking a downward revision from its previous estimate of a 0.2 percent growth.

However, there were more optimistic signs for the economy in separate data published on the same day. Retail sales in November saw a larger-than-expected jump, rising by 1.3 percent from October, boosted by sales during the discount period.

In the United States, the personal consumption expenditures price index, considered by the Federal Reserve as the most credible inflation indicator, experienced a decrease of -0.1% in November compared to the previous month’s reading of 0.0%. This figure fell below market expectations, which were also at 0.0%.

In November, the personal consumption expenditures price index in the United States saw a 2.6% increase compared to the same month the previous year, contrasting with the 2.9% recorded during that period. This result was below market expectations, which had anticipated a 2.8% increase.

The core readings of the index, excluding food and energy prices from inflation calculations, indicated a less-than-expected increase, lower than previous readings. The monthly index recorded a modest 0.1% uptick, suggesting stability in the November reading compared to the prior month. On an annual basis, the index showed a 3.2% increase, which is lower than the 3.4% recorded in the same month the previous year.

Forex

The dollar declined against a basket of major currencies on Friday, reaching its lowest levels in about five months. This followed data indicating a slowdown in annual inflation in the United States in November, reinforcing market expectations of a potential interest rate cut in the country by March.

The inflation rate over the 12 months to November, as per the Personal Consumption Expenditures Price Index, stood at 2.6 percent, down from 2.9 percent in October.

Excluding the volatile food and energy components, the core PCE price index showed a 3.2 percent year-on-year increase in November, marking the smallest rise since April 2021. The Federal Reserve closely monitors PCE price measures with the aim of bringing inflation to its target of 2 percent.

The dollar index fell by 0.13 percent to 101.65 in recent trading, reaching its lowest level since late July. The index has experienced a decline of over two percent over the past two weeks and is poised to end the year with a drop of slightly less than two percent.

The pound sterling increased by 0.28 percent to $1.2728 as traders absorbed data revealing that British retail sales in November exceeded expectations, though third-quarter gross domestic product was revised downward.

Against the yen, the dollar rose by 0.18 percent in the latest trading, reaching 142.37 yen, following data indicating a sharp slowdown in core inflation in Japan in November.

The risk-sensitive Australian and New Zealand dollars traded higher on Friday. The Australian dollar increased by 0.12 percent to $0.6811 in the latest trading, touching $0.6825 earlier, the highest level since July. The New Zealand dollar was 0.24 percent higher at $0.6309, also reaching its highest level in five months.

Oil

Oil prices experienced a decline on Friday, anticipating the weekend and Christmas, amidst expectations of increased production from Angola following its withdrawal from the Organization of the Petroleum Exporting Countries (OPEC). Despite this, prices recorded a weekly increase, supported by positive news about the US economy and concerns that Houthi attacks on ships would elevate supply costs.

Brent crude futures dropped by 32 cents, or 0.4 percent, settling at $79.07 per barrel. Similarly, US West Texas Intermediate crude fell by 33 cents, or 0.5 percent, settling at $73.56.

Despite the decline on Friday, both benchmarks posted a three percent increase for the week, following a gain of less than one percent in the previous week.

The ongoing Houthi attacks on ships in the Red Sea prompted several shipping companies to divert from the region, leading to disruptions in transit traffic through the Suez Canal, where approximately 12 percent of global trade passes.

Meanwhile, Angola’s decision to exit OPEC could potentially attract increased investment from Beijing in the country’s oil and other sectors. Angola currently produces around 1.1 million barrels of oil per day.