Europe trades lower as Covid concerns overshadow impressive PMI data

Covid concerns overshadow impressive PMI data

Stocks in Europe are extending losses on Wednesday as covid concerns overshadow upbeat PMI data. Meanwhile, US futures are bounding higher, highlighting the growing divergence between the near-term outlook for the two regions.

The third wave of Covid is sweeping across Europe and the likes of Germany, France and Italy have tightened their lockdown restrictions. Fears over the impact of tighter lockdown restrictions on the economic recovery are dragging on risk sentiment for a second straight day, even though PMI dated pointed to an encouraging pick up in activity.

PMI data revealed that Eurozone business activity expanded in March for the first time in 6 months. The composite PMI jumped to 52.5, up from 48.8 in February and ahead of the 49.1 forecast, mainly thanks to a surge in manufacturing. Despite the upbeat reading, there are growing concerns over how the bloc’s economy will perform in the second quarter, as Covid cases rise and stricter lockdown restrictions are applied. The longer the lockdown, the deeper the potential economic scaring.

Underlining those concerns, the IFO now expects Germany to see economic growth of 3.7% this year, down from 4.2% forecast just 3 months ago. The Covid crisis dragging on is reducing the likelihood of a strong economic rebound this year.

The Dax is underperforming its European peers -0.5% as it continues to edge away from its recent all-time high.

In the UK, the FTSE was unable to muster a move into positive territory despite the UK economy performing better than expected. Businesses prepping themselves for the long-awaited reopening of the economy boosted activity in both the service sector and the manufacturing sector with the latter seeing activity hit a 40-month high. Meanwhile, the service sector which has been more adversely impacted by the Covid pandemic, smashed forecasts and saw activity hit a 7-month high.

Looking ahead to the US session, US futures are pointing to a stronger start. Both bitcoin and Tesla are likely to be in focus. The cryptocurrency has surged 5% after Tesla CEO announced that Tesla now accepts bitcoin. Whilst details such as pricing policy are short on the ground, the announcement is still music to the ears of bitcoin bulls.

FX – Weak inflation pressurizes the pound

The Pound is underperforming its major peers following an unexpectedly weak inflation print. UK CPI rose 0.1% month-on-month in February. This was up from January’s -0.2% decline but still short of the 0.5% reading expected. Annually, inflation rose 0.4%, well down from 0.7% in the previous month and below the 0.8% reading expected.

Weaker inflation owing to steep discounting on clothing caught the market off guard. Just last week against a backdrop of rising yields, rising inflation expectations dominated suddenly now, annual inflation is 50% lower than expected. However, this steep drop in inflation is unlikely to last. As the economy reopens and people look to refresh their wardrobes, deep discounting is likely to come to an end, relieving pressure on prices.

The pound trades lower versus both the euro and the US dollar. GBP/USD although has picked up off the lows. US dollar strength exerts additional pressure on the pair.

The greenback is trading at a 7-week high on a combination of safe-haven inflows and upbeat comments from a flurry of Fed speakers who hit the airwaves overnight. Falling yields are being overlooked for now as attention shifts back to Capitol Hill for Powell & Yellen’s appearance.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Sophie Griffiths
Sophie Griffiths is a market analyst with OANDA, focusing on the UK and Europe. With almost 15 years of experience, she brings with her a deep-seated understanding of the financial markets, providing timely and relevant fundamental analysis across a broad range of asset classes.