Before the Bell: After US stimulus boosts global sentiment, traders look to ECB today
The muted mood in government bond yields played a role in the rally enjoyed by stocks yesterday.
In the past few weeks, rising yields acted as a catalyst to declines in stocks, while on the other hand, when yields have held steady or slipped, that has typically triggered the buying of stocks.
“Yesterday was like a repeat of Tuesday, whereby eurozone stock markets outstripped the FTSE 100 as mining and banking stocks caused the British market to finish marginally in the red,” commented David Madden, market analyst at CMC Markets UK, this morning.
Germany’s DAX 30 set a new record high, the CAC 40 and the FTSE MIB racked up respectable gains. A sense of optimism ran through the markets as the US’s planned spending scheme and the recovery were on traders’ minds.
Several hours after the end of European trading, it was announced that Congress backed the $1.9 trillion stimulus plan so it will be passed over to President Biden to sign off. The Dow Jones hit another record high, it closed above 32,000, following the announcement of the relief package.
“The bullish sentiment from the US pushed up equity markets in the Far East, in addition to that, European stocks are poised for a positive start,” Madden said.
ECB meeting later today
The European Central Bank (ECB) meeting at 12.45pm UK time will be watched by traders, he pointed out, although no change is expected to policy.
The refinancing rate and the deposit rate are tipped to remain at 0.0 per cent and -0.5 per cent, respectively. In December, the ECB boosted the pandemic emergency purchase programme (PEPP) by €500bn to €1.85 trillion so they will be in no rush to carry out another tranche of easing anytime soon.
Earlier this week it was confirmed the eurozone economy contracted by -0.7 per cent in the final quarter of 2020.
“Keep in mind, the US and the UK grew by 4.1 per cent and 1 perc cent in the same period. The services sector accounts for approximately 70 per cent of output in the euro area,” Madden said.
“The eurozone services PMI reports have been experiencing negative growth in recent months so it is possible a recession is on the cards. On the bright hand, manufacturing is showing respectable growth but it equates to roughly 14 per cent of economic output,” he explained.
In light of the tough restrictions that remain in place in many eurozone countries, the outlook in the near-term is not encouraging.
“To make matters worse, the vaccination rates in Germany, France and Italy are around 9 per cent. In stark contrast, the UK’s rate is approximately 35 per cent, so it is far closer to re-opening its economy,” Madden noted.
It must be pointed out the ECB has been aggressive with respect to providing support to the area, while the protracted response from the EU hasn’t done the region any favours, he added.
Last summer the bloc decided upon a €750bn rescue package, of which only €390bn are grants. Lately, government bond yields saw a few spikes.
“Although it is not a serious issue at the moment, should that trend continue, it could be a problem for indebted countries like Greece, Spain and Italy,” Madden stressed.
The ECB’s press conference at 1.30pm UK time could provide an insight into the thinking of the policymakers. Yesterday the EUR CMC index fell to its lowest level since July, but that has more to do with the rebound in the US dollar and the pound.
“A softer euro makes life easier for the ECB so they will want to keep it that way,” Madden concluded.