Markets struggle on German recession
LONDON - Global stock markets struggled yesterday following news that Europe's biggest economy Germany has entered recession, and after Fitch warned that the US debt standoff could threaten its gold-plated credit rating. German gross domestic product shrank 0.3% in the first quarter after a downwardly-revised contraction of 0.5% in the prior three months, official data showed.
Equities were rattled, having already sunk the previous day on alarm over stalled US debt ceiling talks aimed at averting a painful default. Frankfurt traded marginally lower, while London and Paris each lost 0.1%.
The European single currency recoiled to a two-month low at US$1.0714 before clawing back ground.
“German sentiment took a hit this morning,” Scope Markets analyst Joshua Mahoney told AFP, noting German's recession was led by declining household consumption and government spending.
“Whilemanywillseethiscontraction as a warning sign that Europe's largest economy will drag the region lower, the optimists will also look at these figures as a sign that higher rates are cooling consumption which will ultimately drive inflation lower”.
Most Asian equities also sank on fears over the prospect of a US default, while oil prices retreated on profittaking after three straight sessions of gains. Nerves have been jangled across global markets owing to a lack of real headway in the standoff on Capitol Hill to increase the US borrowing limit so it can meet its debt obligations.
Fitch placed the country's AAAranked credit on “rating watch negative” -- a move it said “reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit” ahead of a looming deadline. The announcement raises the possibility of a first ratings downgrade since S&P did so during a similar standoff in 2011.
The US Treasury Department has said June 1 is the “X-date” when the government will run out of money, triggering a default with likely devastating economic consequences.
Talks earlier this week between president Joe Biden and Republican House Speaker Kevin McCarthy were described as “productive” but the two sides have made little progress since, with Republicans demanding spending cuts but Democrats calling for a “clean” increase.
Analysts said that while there is a broad expectation an agreement will finally be reached -- likely at the last minute following a period of brinkmanship -- but investors were growing increasingly agitated and risk-averse.
Worries over the possibility of more Federal Reserve interest rate hikes were also dampening sentiment. Minutes from the Fed's most recent policy meeting showed officials split on what to do at their June gathering, with inflation still more than double a two percent target.