After a stellar session on Monday that saw the S&P enjoy its strongest day of gains in nine months, Europe opened on the defensive. Warnings over asset bubbles from Chinese officials, fresh concerns over Covid numbers and dismal German retail sales figures all briefly weighed on sentiment. However, cautious optimism has started to seep into the markets and some European equity indices are turning higher.
WHO warns on rising Covid numbers
Despite recent encouraging developments regarding Covid vaccine rollouts, a report from the World Health Organisation that the number of new daily infections rose last week for the first time in seven weeks is unnerving investors. Vaccine developments and optimism surrounding the reopening of economies has driven global stock markets higher since November. However, today’s WHO report is a stark reminder that the battle has by no means been won, serving as a check on risk sentiment.
German retail sales plunge
German retail sales plummeted again in January falling -4.5% MoM, significantly weaker than expected. The dismal reading came following a -9.1% drop in December. With Germany still firmly in lockdown, retailers are unsurprisingly bearing the brunt of the restrictive measures, although the depth of the decline caught the markets by surprise.
Yields in focus
Yields remain in focus, particularly after last week’s bond market mayhem. However, the 10-year treasury yield has stabilised around the 1.4% mark, a level that is allowing stocks to recover but is also supporting the US dollar.
The FTSE is outperforming its European peers thanks to the weaker pound along with strength from insurers and housebuilders on upbeat earnings.
FX – USD King
The US dollar remains firm, benefitting from the jittery market mood and the Fed’s clear dismissal of higher yields in sharp contrast to other central banks. The ECB has signalled that it stands ready to push yields lower.
EUR/USD trades under pressure owing to this divergence over yields, but also following lacklustre inflation in the bloc. Eurozone CPI printed at 0.9% YoY in February, a significant distance from the ECB’s 2% target. Core inflation also drifted lower to 1.1%, down from 1.4% in January.
GBP/USD is extending its selloff for a third consecutive day as the Chancellor’s Spring Budget comes into focus. While an extension to the furlough scheme, support to the UK high street and a boost to home buyers are all considered pound positive, speculation is rising that these measures will be accompanied by a rise in corporation tax and a freeze on the income tax thresholds, pound negative measures.
