European Markets Weak On U.S. Default Worries, German Economy In Technical Recession

Bridgette Randall
25 May, 2023
Frankfurt

European markets lacked direction in weak sentiment after German economic growth was revised lower. 

Benchmark indexes trended lower and Germany's first quarter economic growth was revised to 0.3% decline, second quarterly contraction in a row, indicating technical recession. 

The White House and the Republican leaders reported progress in the latest round of talks but an agreement was still further than expected. 

The U.S. federal government is expected to run out of cash in six days but leaders of both parties showed no urgency to strike a deal, suggesting that any deal may be struck only in the last hour. 

Fitch Ratings placed the U.S. debt with "AAA" rating  on watch with a potential downgrade, the first rating agency to take the proactive step. 

Two other leading agencies, S&P Global and Moody's, have yet to announce their rating outlook decision, despite the heightened level of partisanship that could lead to catastrophic debt default.   

Investors rely on credit ratings as one of the metrics in assessing the risk profiles of governments and companies. 

 

German Economy In Technical Recession 

Germany's GDP contracted at 0.3% in the first quarter from the previous quarter, the Federal Office of Statistics reported Thursday. 

The first quarter GDP adjusted for calendar and seasonal factors was revised to a decline from the preliminary estimate of flat growth on weak household consumption.   

The economy contracted 0.2% from a year ago in the first quarter. 

Germany's economy declined 0.5% in the fourth quarter and entered into a technical recession with two quarterly declines in a row. 

Household consumption declined 1.2% in the quarter after elevated prices forced consumers to trim spending, automobile sales were also down after the government withdrew the subsidy for electric and hybrid vehicles. 

Moreover, government spending fell 4.9% but gross fixed capital formation in machinery and equipment increased 3.2% and net exports contributed 0.7% to the GDP in the first quarter. 

 

Europe Indexes & Yields 

The DAX index decreased 0.008% to 15,842.47,  the CAC-40 index fell 0.1% to 7,244.50, and the FTSE 100 index decreased 0.1% to 7,617.86. 

The yield on 10-year German Bunds inched up to 2.47%, French bonds traded higher to 3.04%, the UK gilts inched higher to 4.31% and Italian bonds increased to 4.31%.

The euro edged lower to $1.075, the British pound to $1.234 and the Swiss franc to 90.55 cents.

Brent crude declined $1.02 to $77.33 a barrel and the Dutch TTF natural gas decreased €1.49 to €26.30 per MWh.

 

Europe Stock Movers 

Deutsche Boerse AG declined 1.06% to €163.90 after the German stock market operator made a formal offer to acquire SimCorp at 735.0 Danish kroner per share. 

Johnson Matthey Plc declined 1.7% to 1,837.0 pence after the UK-based chemical company reported a decline in annual profit. 

Hill & Smith Plc advanced 4% to 1,420.45 pence after the company reported a record operating performance in the four months to the end of April. 

Renewi Plc dropped 1.9% to  575.0 pence after the waste-to-product company reported a decline in the fiscal year 2023 on higher costs and volatility in recyclate prices.