Markets sell-off drives down Europe chemical stocks

LONDON (ICIS)–European chemical company stocks fell on Thursday amid a wider market sell-off as below-expectations US retail financials and high domestic inflation drive fears that falling consumer demand could result in a recession.

Key US bellwether stocks missed Q1 expectations

US indexes fall to 2020 lows, Europe bourses follow suit

Cost-of-living crisis reduces consumer spending on finished goods

Inflation, energy, supply issues stoke recession fears

US stock markets fell to their lowest levels since the height of the pandemic in 2020 following below-expectations quarterly financial results from big-box retailers such as Walmart and Target, seen as bellwethers for how consumers are coping with the higher cost of living.

Investors took fright after Walmart cut its full-year earnings guidance from an increase to a decrease, with CEO Carl Douglas McMillon noting that the pace of food cost increases were driving consumers away from higher-margin goods such as electronics.

“The rate of inflation in food pulled more dollars away from [general market goods] than we expected as customers needed to pay for the inflation in food,” he said on an earnings call this week.

Market fears from bearish Walmart numbers intensified when rival US retailer Target announced on Wednesday that first-quarter operating margins had been “well below expectations”, while tech and telecommunications giant Cisco missed quarterly revenue expectations and cut full-year guidance.

MARKET UNEASE
The performances misses stoked market fears that the extent of the cost of living increases seen across much of the globe, as a result of soaring inflation, supply chain disruptions and energy price surges could result in a significant enough drop in consumer spending to push economies into recession.

The US S&P 500 index closed down over 4% on Wednesday and European bourses opened on a similarly bearish note.

Key indices in the UK, Germany and France were all trading down over 2% from yesterday’s close in morning trading.

Chemical company stocks were trading down across the board in the Stoxx Europe 600 Chemicals index, which had fallen by 2.13% as of 12:30 CEST.

Among the sharpest individual share price losses were Solvay, BASF and Covestro, which were trading down 4.18% , 3.21% and 3.10% respectively.

Recessionary fears have also been stocked by the impact of China’s renewed COVID-19 lockdowns, which have significantly hit demand for many chemicals players over the last two months, and the Russia-Ukraine war, pushing logistics further into disarray and intensifying energy price surges.

INFLATIONARY PRESSURES, RAW MATERIALS COSTS
Inflationary pressures remain strong in Europe, with levels in the eurozone holding steady at 7.4% in April and UK inflation rising two percentage points to 9% the same month, the highest level in four decades.

European chemicals firms passed on price increases of over 30% in some cases in the first quarter after substantial hikes in the preceding three months to keep up with energy and raw materials cost increases.

Those increases have started to filter through to the consumer side of the value chain, resulting in higher costs for goods of all kinds and further price firming likely in the coming months.

Taken with the consumers allocating more cash towards food purchases and earmarking discretionary spending on travel and services, as indicated by recent PMI data for the eurozone, current trends could result in reduced spending on finished goods. This could could further hit chemicals sector demand.

Further central bank interest rate hikes to combat inflation could further impact on consumer demand.

Front page picture: Stocks plummeted on the New York Stock Exchange (NYSE) on Wednesday 
Source: Xinhua/Shutterstock

Focus article by Tom Brown