A summer slide in stocks may have begun this week with European stocks falling to their lowest levels in 2 months. US debt ceiling talks dragged on, UK inflation ran hot prompting calls for even higher UK rates, and geo-political risk continued in the background. Although the US debt ceiling issue is expected to be resolved by next week at the latest, the closer we get to the June 1 deadline, the greater the chance there is of a default. So, this is now a game of political brinkmanship with serious economic risks at stake if it goes wrong.

Other key events from the past week

• USD: Debt ceiling talks, May 22: Debt ceiling talks still dominated markets this week. With a deadline of June 1 being circulated the risk is that the US may head into a default if the debt ceiling is not raised. If the US defaults on its debt then some analysts see a 15% correction lower in the S&P500 possible.
• UK inflation data: Hot inflation, May 24: Going into this inflation print it was going to be an important one for BoE policy. The headline came in at 8.7% y/y and the core above all economist’s expectations at 6.8%. Interest rate markets immediately priced in a 100% chance of a 25 bps June rate hike from the BoE.
• Euro Stoxx: European stocks sink, May 24: A flurry of negative sentiment news hit European markets this week. High UK inflation, geo-political tensions, debt ceiling talks, and weak seasonal stock patterns all sent European stocks to their lowest levels in 2 months midweek. Are there more falls to come?

Key events for the coming week

• EUR: Eurozone inflation, June 1: Eurozone inflation data is expected to fall in May to 6.5% y/y from 7% prior. Investors will watch the inflation print closely. If the print comes in higher than expected then watch for potential EUR strength.
• Seasonal Insights: Time for Illumina to shine?
• USD: US labor data, June 2: US labor data next week will be a major focus for investors. Investors will look for signs of weakness in the US labor market to confirm a Fed pause in rates. Watch the EURUSD closely for volatility over the US labor print next week.

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