European stocks 'under pressure' from falling oil prices

Falling oil prices added pressure to European stocks on Friday (August 14th), seeing them sink to their worst week for the last six. Markets across the globe struggled against China's surprise devaluation of the yuan.

Early in the day, the news that the Greek parliament had approved a bailout package worth €85 billion helped markets rise briefly, supported by the euro. However, weaker-than-expected economic growth in the eurozone failed to impress investors, leaving market sentiment in a fragile state.

The FTSEurofirst 300 index lost early gains on Friday, trading down 0.2 per cent by 10:40 BST, while the Euro STOXX 50 lost 0.7 per cent, driven down by a one per cent fall in oil and gas shares. Before Wall Street opened for business, US stock futures had already shaved off 0.2 per cent.

Overall, European stocks are on track for a weekly loss of three per cent, marking their biggest fall in six weeks. If the decrease hits 3.5 per cent for the week, it will be the biggest decline of 2015 so far.

The yuan and the People's Bank of China's (PBoC's) decision to devalue the currency have been weighing heavily on European equities, which has massively impacted auto stocks, miners and luxury firms.  

In a note to clients, Morgan Stanley said: "We think it plausible that European equity markets have reacted too negatively to the four per cent depreciation of the yuan. Any indications that China may introduce a wider stimulus program could shift sentiment from risk-off to risk-on as investors consider the potential for better global growth."

The Greek parliament voted to approve the latest bailout package from international creditors early Friday, but prime minister Alexis Tsipras now faces a backlash from his own party for accepting the stringent terms of the deal and must deal with a confidence vote later this month.  

Elsewhere in Europe, data reveals that the economies of Italy and Greece grew at a much slower pace than was expected in the second quarter of 2015, but the situation in France was much worse, as no expansion at all was registered for the country's economy.

In commodities, oil continued on its downward slide, with prices slipping to their lowest since March 2009. Emerging market currencies, including Turkish lira and South African rand, plummeted to record-breaking lows.

US crude dropped to a fresh six-and-a-half year low of $41.35 a barrel, while a surge in US stockpiles augmented worried over an ever-increasing oversupply. Brent was flat at $49.21 per barrel.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped by 0.1 per cent, closing the week with a loss of 2.7 per cent - its biggest loss since July. Japan's Nikkei stock index shaved 0.4 per cent, pushing its total loss for the week to one per cent.

Before the market opened. the PBoC set its midpoint yuan rate to 6.3975 per dollar, boosting its strength compared to Thursday's close of 6.3990. The currency was also able to firm up in spot market trading, selling for 6.3918 late in the Asian session.

Overall this week, the yuan has fallen by almost three per cent after the PBoC made the decision to devalue the currency on Tuesday, making the commitment to allow market forces to become more involved in setting the exchange rate.  

Markus Huber, senior equity sales trader at Peregrine & Black, told Reuters: "We just need to see if the yuan is going to stay halfway stable over the next few days, then confidence is going to come back.

"If China calms down, we're going to have the potential for a rate hike in the US on the table again, and that could be the next drag on markets."