Before the Bell: Europe pointing to lower start as bulls take a breather
Equity markets started off the new month on the front foot yesterday as lower bond yields combined with stimulus hopes from the US boosted sentiment.
Last week, stocks saw some selling pressure as increases in government bond yields acted as an excuse for dealers to reduce their equity positions, indices were coming from a relatively high position.
“Worries that we are in for higher inflation were the driving force behind the move higher in yields. Commodity prices are on the rise as there is a view in the markets that mineral demand will increase in the months ahead as economies should loosen restrictions,” explained David Madden, market analyst at CMC Markets UK, this morning.
For Madden, higher inflation seems “like a foregone conclusion” since we have seen multi year highs” in metals and oil registered a 13 month high recently.
That being said, the Federal Reserve doesn’t seem that worried about an increase in inflation or bond yields, while the ECB indicated they would amend their bond buying scheme as a way of keeping yields under control.
Seeing as equity markets lost ground last week, traders were content to pick up relatively cheap stocks yesterday, Madden continued.
“It was a broad based rally, as banking, retail, travel, transport, commodity, property and consumer stocks saw gains.”
Over the weekend, the House of Representatives supported the proposed $1.9 trillion stimulus package put forward by President Biden. Senators are now debating the spending scheme, so there are hopes it will be signed off soon.
“The bullish mood was not just confined to stocks as metals and oil enjoyed rallies too but some of the commodities handed back earlier gains toward the end of the day,” Madden said.
Positive territory
Britain’s vaccination programme is still going well as more than 20m people have been vaccinated. As the scheme ticks along, the UK edges closer to unwinding some of its restrictions.
“The CMC GBP index was in positive territory for much of yesterday but the bullish move ran out of steam towards the end of the session,” Madden said.
Judging by the manufacturing PMI reports that were posted in Europe yesterday, it appears that activity in the eurozone and the UK has not been impacted too badly by the health crisis. The readings from Spain, Italy, France, Germany and the UK all showed increases on the month, Germany’s reading was fastest rate of growth in three years.
The Bank of England’s (BoE) consumer credit reading for January was –£2.39bn, which was a big drop from the -£0.87bn registered in December, Madden pointed out.
“When you take into consideration the 8.2 per cent fall in UK retail sales in January, it seems clear that consumers were content to curtail their spending, possibly due to the uncertain economic environment,” he explained.
“There has been a lot of talk about pent-up demand being released once the restrictions are relaxed but in light of this data, that might not be the case,” Madden concluded.