European stocks are rebounding on Wednesday after Tuesday’s steep sell-off. Stocks are on the rise, however, there is an air of caution amid concerns over slowing economic growth and rising Delta cases.
European indices have been on a tear as successful vaccine programmes have seen economies re-opening, boosting sentiment and economic growth. However, a few signs are emerging that this growth could be starting to wane, which could begin to put brakes on the relentless move higher in recent months.
Yesterday, German ZEW sentiment slipped lower and factory orders tumbled, while US ISM services PMI missed forecasts, suggesting the re-opening peak may have been reached.
Today, concerns surrounding the economic outlook are being overshadowed by upbeat corporate updates as oil major Shell announced it will step up its distributions to shareholders. Heavyweight SAP also had its target price lifted to EUR125 by Bank of America, a 25% upside from Tuesday’s close.
Looking ahead, US futures are climbing higher, once again led by the tech-heavy Nasdaq. The Nasdaq struck a fresh all-time high in the previous session, while the Dow Jones, which is more closely tied to value stocks, closed lower. The rotation back into high-growth stocks and out of value is taking hold as US treasury yields fall. The high-growth tech sector often outperforms cyclicals when yield curves flatten, particularly longer-dated rates, as this boosts tech stock valuations, and therefore their appeal.
All eyes will be on the FOMC minutes due to be released later today. The minutes are from the mid-June Fed meeting, which saw the US central bank adopt a more hawkish stance. At the June meeting, the Fed announced it expects two rate hikes in 2023, as opposed to nothing until 2024 previously. Should the minutes have a strong hawkish tilt, they could unnerve investors. However, this meeting was three weeks ago and could be now considered stale, particularly in light of the tick higher in unemployment in the June employment report and yesterday’s weaker ISM services data.
FX – USD treads water ahead of FOMC minutes and jobs data
The US dollar is treading water ahead of the release, holding gains from the previous session. The minutes could well be considered stale, but even so, investors will be scrutinising them to draw a parallel with some of the more hawkish comments from Fed speakers since the meeting.
Prior to the minutes, attention will fall on the JOLTS job opening data, which could well show a new record 9.388 million vacancies in May, greater than the 9.28 million in April. Given the tick higher in unemployment, a new record number of vacancies will raise more questions than it gives answers.
