Market movers: China sell-off spooks Europe, oil, Imperial Brands

Victoria Scholar, interactive investor's head of investment, runs through today's big stories and how financial markets are reacting. 

EUROPEAN MARKETS

Positive momentum was short-lived for global equity markets, with European equities trading sharply lower on Tuesday with the DAX and CAC leading the charge. The FTSE 100 is down more than 1.5% as the index inches closer to key support at 7,000 as the Russia-Ukraine war, tightening global monetary policy and a brutal sell-off in China weigh on sentiment. Polymetal International (LSE:POLY), Prudential (LSE:PRU) and Standard Chartered (LSE:STAN) are struggling at the bottom of the UK index.

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CHINA SELL-OFF

The bloodbath for Chinese equities extends, with the Hang Seng in Hong Kong shedding another 5.7% reaching the lowest close since February 2016. Having slumped 11% on Monday, its tech index shed another 8.1% on Tuesday with fears there is more downside to come. More than $460 billion has been wiped from China’s tech sector this year. The negativity has spread beyond China’s borders, with chip makers in Europe taking a hit.

A toxic combination of rising Covid cases and China’s stance towards the Russia-Ukraine conflict have prompted international investors to shun Chinese equities. This prompted a harsh assessment from analysts at JPMorgan which has downgraded 28 Chinese internet companies including Alibaba (NYSE:BABA) and Tencent (SEHK:700) to 'underweight', labelling them as "un-investable" over the next 12 months.

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OIL

Oil prices are down by more than 5%, reaching two-week lows. The prospect of a diplomatic solution towards Russia’s military aggression against Ukraine would help ease the world’s energy supply shock that has sent commodities soaring. Although no progress was announced, the two sides engaged in their fourth round of talks on Monday. Meanwhile on the demand side for oil, fears about an aggressive policy response from Beijing to China’s Covid outbreak has raised the prospect of much weaker demand for oil from the world’s second largest economy.

Brent crude has now reversed all of its March gains and is on track to break below psychological round number support at $100 a barrel. The possibility of softening demand from China and an end to the tensions between Russia and Ukraine suggest that supply and demand could start to come more into balance.

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UK UNEMPLOYMENT 

UK unemployment fell to 3.9% in the three months to January, coming in stronger-than-expected for 4% and at a two-year low restoring pre-pandemic levels as the labour market continues to recover.  However, average pay excluding bonuses taking inflation into account fell by 1% as the rising price environment erodes away at individuals’ earnings, despite pay increases, which have failed to outpace inflation. Job vacancies rose once again in Dec-Feb to a fresh record 1.318 million from 1.213 million in the previous quarter.

While the headline unemployment figure was strong, basic pay fell behind inflation at the fastest rate for seven years, highlighting the cost-of-living crisis facing the UK economy. The labour market continues to paint a picture of low unemployment, record high job vacancies and rising economic inactivity with many individuals choosing not to participate in the labour market causing many firms to struggle to attract staff. Clearly, these figures represent the period before the onset of war between Russia and Ukraine, and the upcoming months’ data will give some insight into how the geopolitical uncertainty has impacted hiring.

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IMPERIAL BRANDS

Shares in Imperial Brands (LSE:IMB) are trading slightly lower after highlighting a small hit to its revenue and profit outlook from its decision to exit from Russian. The company is starting to transfer its business to a local third party in light of the crisis in Ukraine. Imperial Brands now expects 2022 revenue to be flat versus growth of 1% in its prior forecast.

Imperial Brands shares are trading broadly in line with the weaker market today with its business in Russia and Ukraine accounting for just a small 2% of its net revenue last year. The company has come under customer and shareholder pressure to leave Russia and Ukraine in light of the war, as have its rivals British American Tobacco (LSE:BATS) and Camel. Despite broader resilience from the FTSE 100, Imperial Brands’ shares have suffered sharp declines lately down by 15% since February’s peak.

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BANK OF AMERICA SURVEY 

Investors have increased their cash holding to a two-year high, according to the Bank of America monthly fund manager survey amid fears about the Russia Ukraine war and the prospect of slowing global growth. Most investors are forecasting an equity bear market this year with the lowest levels of allocations to global equities since the height of the pandemic in May 2020.

The results of the survey clearly highlight a notable sense of nervousness among investors towards the cocktail of pressures from Ukraine and Russia, worsening inflation, China’s economic slowdown and a broader deceleration in global growth. After an indiscriminate upswing for equities since the March 2020 lows, 2022 is proving to be a lot more challenging for investors, with many looking to cash in order to preserve their wealth, despite spiralling inflation levels, which could erode that money in the bank.