European stocks are pushing cautiously higher, boosted by economic recovery optimism. Follow-through buying after President Biden signed a USD1.9 trillion stimulus bill – the largest in US history – is supporting demand for stocks, along with upbeat data from China.
The funding taps are being turned on and nobody wants to miss out, even though inflation expectations remain elevated. The Dow and the Dax both reached record highs last week on the prospect of a faster global economic recovery. Meanwhile, the CAC trades at a yearly high and the FTSE a two-month high as the new week kicks off.
While the US appears to be the only show in town right now, upbeat data from China is proving to be a good sideshow. Economic activity boomed over the last 12 months as the world’s second-largest economy recovered from the pandemic hit.
The mood is upbeat as we start the week, although gains in Europe remain capped as investors struggle to brush off rising concerns over covid developments on the continent. Warnings of a third covid wave in France, Germany and now Italy come at a time when the region is grappling to get its vaccine programme off the ground. Short supply is not the only concern, with an increasing number of countries also suspending AstraZeneca’s jab over fears of adverse reactions.
Given that further lockdowns have the potential to prolong or even derail any recovery, the near-term outlook for the region is still on shaky ground.
US futures are pointing to a stronger start ahead of a key Fed meeting on Wednesday. Recovery optimism is lifting equity demand. However, concerns that rising inflation could force the Fed’s hand to tighten policy sooner are showing no signs of disappearing any time soon. These fears now pose the biggest risk to the stock market’s bull run.
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