European bourses are out of the blocks on the front foot after an upbeat session on Wall Street, which saw the Dow and the S&P500 hit fresh all-time highs. Encouraging earnings from the likes of Volkswagen and Zalando are underpinning the mood as is the better-than-expected ZEW sentiment data for the region, providing a good distraction from the one-step-forward, two-steps-back vaccine debacle in Europe.
The record high reached in the US overnight reflects a strong positive mood in the market, which has carried over into the European session. Investors are betting on a dramatic US economic recovery supported by a huge US fiscal stimulus package and a rapid vaccine rollout programme.
While the US and the UK are powering forward with the Covid vaccine rollout, the same cannot be said for Europe. Germany, France and Italy have suspended the use of the AstraZeneca vaccine over fears of its safety, at a time when a third wave of Covid is emerging.
The suspension of the AstraZeneca vaccine deepens concerns over the pace of the vaccine rollout on the continent. For now, such concerns aren’t capping gains in the equity markets, and the Dax continues to hover around fresh all-time highs.
Gains in the Dax are being supported by upbeat earnings from both Zalando and Volkswagen as well as a higher than forecast ZEW sentiment index. German ZEW economic sentiment jumped to 76 in March, well ahead of February’s 71.2 and the 74 expected.
Elsewhere, FTSE is outperforming its peers predominantly owing to the sell-off in the pound. The UK index is testing strong resistance around 6800, which has so far proved a tough nut to crack.
The intense focus on US treasury yields is easing, aided by a shift lower in the benchmark 10-year bond yield to 1.60% ahead of the Fed’s rate decision tomorrow. No change in policy is expected. Both the GDP and inflation forecast are expected to be upgraded and accompanied by a statement from the Fed saying they will remain accommodative. A win-win for the markets, surely? Only if they believe the Fed.
US futures are easing back off the record highs reached in the previous session. Attention will now turn to US retail sales, which are expected to ease slightly -0.5% MoM in February after January’s outsized gain of 5.3%.
FX – Brexit & BoE’s commitment to bond buying drags on GBP
Dovish comments and continued Brexit angst is ensuring that the pound is the weakest link in the G10 currency space. The pound is extending its slide following last week’s rejection of the key 1.40 psychological level and now targets 1.38 near-term.
The European Union launching a legal attack on the UK over its alleged violation of the Brexit divorce deal shows just how strained post-Brexit relations are. The revelation comes after data last week revealed that UK exports to the EU had crashed by 40% in January, the first month post-Brexit.
Brexit drama overshadowed comments from Bank of England Governor Andrew Bailey, who is cautiously optimistic regarding the outlook for the UK economy. Bailey saying he expects to see the UK economy return to pre-pandemic levels by the end of the year and inflation ticking over 2% in the coming months would usually provide a strong lift for the pound. However, the fact that the BoE intends to continue its QE programme across the year also means no change in policy is on the cards. Moves to tighten policy remain firmly in 2022 for now, giving pound bulls little reason to drive higher.
Oil extends losses on European Covid concerns
Oil prices are trending lower for a third straight session amid rising concerns over the resurgence of Covid in Europe and as investors look ahead to stockpile data.
While European indices are willing to brush off rising Covid cases and a slow vaccine rollout, the oil market is less willing to do so. Fears regarding future demand are resurfacing as Europe’s Covid situation appears to deteriorate.
The American Petroleum Institute is due to release stockpile data later today. Stockpiles in the US have risen sharply over recent weeks following the deep freeze in Texas. Oil prices remain under pressure as inventories are still expected to show significant gains.
Gold in wait-and-see mode ahead of FOMC
Gold is seeing very little action on Tuesday, trading in the middle of a relatively tight range. While the precious metal is supported by falling treasury yields and the AstraZeneca vaccine situation in Europe, a rising equity market and broad risk on trade are unsupportive of the safe-haven asset.
For now, investors are likely to sit on the sidelines ahead of this week’s key risk event – tomorrow’s FOMC monetary policy meeting. The prospect of a faster US economic recovery was boosted by Biden’s USD1.9 trillion stimulus package. Inflation expectations jumped and investors started to price in an earlier move to tighten policy by the Fed. Therefore, tomorrow’s FOMC is expected to be a key factor in deciding non-yielding gold’s next move.
It is noteworthy that gold has posted slight gains in the past week. These gains are significant in that they have come against a backdrop of moves elsewhere that have sent gold lower in recent times. If the Fed disappoints markets on holding down yields, gold could face renewed downward pressure.
