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Moody’s European Black Cloud

Another poor day for European stock markets yesterday, predominantly driven by poor performance in the retail sector. Blaming it on an early Easter weekend, the high street and out of town retailers were pretty much lower across the board than last year and the overall European retail sales index showed a 0.5% contraction versus last year. In the UK, supermarkets are feeling the pinch from price falls and margin squeezes, Sainsbury’s reported a 14% fall in its earnings, which it’s putting down to food price deflation. The news did the share price no favours, making it one of the worst performers yesterday, losing nearly 7%.

Moody’s are the harbingers of European doom this morning, with a report that says “even if the EU survives its current challenges largely unscathed, even a ‘small’ future crisis could threaten the sustainability of current institutional frameworks, if it coincided with negative public sentiment and populist political developments. This can create the impression that the question is when the system breaks, rather than if.” – we don’t think we need to analyse that statement to get to what they really think!

Greece could be one of those situations, according to the Telegraph. They say that Greece could be just weeks from another debt crisis, as large repayments are due in July that Athens may not have the cash to satisfy. The irony is that Greece needs to get the next bailout tranche to make the repayment on the last bailout, but those funds are being held up by the ‘first review’ which Greece is yet to pass, as the IMF and the EU disagree on what they’ve actually achieved. Though summer just wouldn’t be summer without a Greek crisis unraveling the background.

In the US, John Kasich is now out of the Republican race (not that he was ever really in it) which has effectively given Trump the candidacy, as no one is left to contest him. Investor Jeff Gundlach, speaking at Sohn Investment conference, has warned that a Trump presidency is going to be very borrowing intensive, saying “he promises a wall, he promises to bring jobs back and he promises a lot of infrastructure spending. Let’s face it, Trump is extremely comfortable with debt”.

Another speaker at Sohn was Stan Druckenmiller, a billionaire investor with a great long term track record. He says that his biggest asset allocation is gold, because the equity bull market has exhausted itself; “volatility in global equity markets over the past year, which often precedes a major trend change, suggests their risk/reward is negative. Without substantially lower prices and/or structural reform, don’t hold your breath for the latter”

The Reserve Bank of Australia threw another curve ball this week, announcing a new governor. Glenn Stevens will stand aside to new governor Philip Lowe. Mr Lowe was the deputy governor and recruited by Glenn Stevens, who cut rates on Monday night to record lows – leaving the new governor with less policy wiggle room should prices continue to fall. The appointment won’t come into effect until the autumn.

Overnight; markets have moved into the green a little, which is helping Europe get off to a slightly positive start today. Data today is pretty light, but UK services PMI at 09.30 will be of interest, as will US jobless claims, as a precursor to tomorrow’s non-farm payrolls number.