The confidence deficit: central bankers and Heathrow fire weigh on markets
Stock markets in Europe are a sea of red as we end the week, and the great European stock market rally may have stalled. The German Dax index, the best performing index in Europe so far in 2025, is set for a weekly decline, while the Eurostoxx and the FTSE 100 are expected to eke out meagre gains for the week. US stocks closed in the red on Thursday and hopes that a reassuring message from Jerome Powell on Wednesday would spur a recovery rally have been dashed.
Heathrow closure gives investors another excuse to sell airlines
Neatly all sectors of the FTSE 100 are in the red on Friday, suggesting that the risk off tone to markets is broad based. The biggest decliners include airlines and hotel groups, with IHG leading the index lower at the end of the week. The fire in Heathrow is having a big effect on the airline sector in Europe and elsewhere. IAG, the owner of BA and Iberia, is down more than 3%, while KLM- Air France is also lower by 1.5% so far. Ryanair, which doesn’t even fly into Heathrow, is joining the sell off. In the US, Delta and American Airlines are mostly flat in the pre-market. The disruption caused by the Heathrow closure for the entire day on Friday is huge, but it will be temporary, and we expect airline stocks to stabilize after an initial knee jerk sell off.
The airline sector is fragile now, due to concerns about a US recession and a weak global consumer. IAG’s share price is down 16% in the past month, so news of disruption at Europe’s busiest airport is the latest event to knock this sector.
The confidence deficit
Overall, stocks are sliding because of a lack of confidence. There is a confidence deficit around the world, which has been triggered by the unorthodox economic policies of Donald Trump. Although US stocks are set to break their streak of losing weeks, with gains of more than 2% for the S&P 500 and the Nasdaq so far this week, the recovery has stalled after a raft of central bankers refused to commit to future rate cuts, and left open the possibility of a prolonged pause in monetary policy loosening.
The common thread between the Fed, the ECB, and the BOE is uncertainty. This is not helping to create an environment where risk sentiment can flourish. Investors are on their own, their capital is at risk and the Fed and other global central banks aren’t there to catch them. This means that risk sentiment could be shaky until we get 1, good earnings data for Q1, or 2, signs that the real economy, especially in the US, is not as bad as originally thought.
The dollar: can the recovery continue?
US economic futures are also pointing to a lower open today and expect more volatility than usual due to the triple witching option expiry that is due on Friday. While stocks are selling off in unison in Europe and the US is headed for another weak open according to futures markets, something interesting is going on in the FX market. The dollar is the best performing currency in the G10 FX space this week, reversing weeks of losses. I t’s too early to call this a trend, but the dollar index does look to have put in a bottom around 103. Until the dollar index breaks above 104.90, the 200-day sma, then we can’t call this a recovery for the greenback. However, if the dollar continues to extend gains into next week, this could thwart gains for the euro and the pound going forward. The uplift to Fed inflation forecasts seems to have boosted the dollar. However, we are wary that Treasury yields have continued to fall this week, and the 2-year Treasury yield is down 10 bps in the past week. Something must give, could the FX market pre-empt a selloff in Treasury yields, or will the lack of yield support weigh on the dollar? This is one to watch.
More bad news on UK public finances, but bond market stable for now
UK bond yields are higher today, after another month of weak public finance data. The fiscal optics are not good leading up the Spring Statement next week. However, the recent announcement of sharp spending cuts linked to the welfare bill has been welcomed by the UK bond market. Not long ago, the UK bond market would have freaked out on the back of weak public finances and the prospect of reduced fiscal headroom, but the message from government about public spending has been welcomed by the UK bond market. The pound is lower on Friday, as weak fiscal data hinders GBP/USD’s hopes of breaching the $1.30 level, which could be a step too far in the short to medium term.
Gold is lower today, although that could be linked to the triple witching. There are no major data releases from the US today, so stocks may drift into the weekend.
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