Europe Set For Bear Market, Recession As Money ‘Pours Out’

Risk assets were in trouble Friday, as European shares careened lower amid poor data, war worries and panic over the UK’s finances.

Preliminary PMIs for September suggested eurozone manufacturing and services sector activity contracted again, with marked weakness in Germany.

The flash print on S&P Global’s bloc-wide composite gauge was 48.2, a 20-month low. At 48.9, the services gauge sank further into contraction territory. The manufacturing print, 48.5, was likewise lackluster. Europe is either headed for recession or already there, depending on who you ask.

“The eurozone economic downturn deepened in September, with business activity contracting for a third consecutive month,” S&P Global said, in the color accompanying the release. “Although only modest, the rate of decline accelerated to a pace which, barring pandemic lockdowns, was the steepest since 2013 [while] forward-looking indicators, such as new order inflows, backlogs of work and future output expectations, point to the decline gathering further momentum in coming months.”

The German survey showed 28-month lows for the composite and services sector gauges, both of which are well into contraction territory. The manufacturing index held up a bit better, but it too is below the 50 demarcation line.

Last month’s harrowing surge in European gas and power prices drove PPI inflation in Germany even further into nosebleed territory, partially negating recent progress on the price growth front. “Just when it looked like underlying inflationary pressures might be easing, a fresh surge in energy prices has seen business input costs rise at a faster rate for the first time in five months, in turn leading to a renewed acceleration in average prices charged for goods and services,” Phil Smith, Economics Associate Director at S&P Global Market Intelligence, said, on the way to suggesting the world’s fourth-largest economy will likely contract this quarter and, quite possibly, next.

The French services sector appeared resilient, but that’s small comfort. European shares were bludgeoned Friday (figure below), and the euro fell further below parity.

The unveiling of Liz Truss’s economic plan for the UK was billed as potential disaster, which was either insult to injury or impetus for the rout. It doesn’t much matter which.

The European benchmark now sits at the lowest since December of 2020, and looks set for a bear market. It didn’t help that Credit Suisse dropped to a record low on rumors the bank is pondering an exit from the US.

European stocks have fallen in eight of the last nine sessions. Money is “pouring out of European equity funds,” BofA’s Michael Hartnett remarked.

The figure (above), shows 32 consecutive weekly outflows.

Commenting on the outlook for the bloc’s economy Friday, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, was direct. “The surge in energy costs has reignited inflationary pressures which, having shown some signs of cooling in prior months amid easing supply shortages, have reaccelerated,” he said. “The challenge facing policymakers of taming inflation while avoiding a hard landing for the economy is therefore becoming increasingly difficult.”

This is the backdrop against which the ECB will continue to hike rates in large increments.