European bourses have started the week on the front foot with the Euro Stoxx 50 following in Wall Street’s footsteps, scaling to a fresh all-time high. The FTSE is letting the side down as weaker commodity prices drag the heavyweight miners lower. Housebuilders are also under pressure after mortgage approvals fell by more than expected in February.
Sentiment surrounding European stocks is surprisingly upbeat, given the third wave of Covid currently sweeping across the region. Equity markets are looking through near-term Covid troubles in the old continent and are instead growing increasingly confident of a strong global recovery led by the US. A fast vaccine rollout stateside combined with the massive recently-approved stimulus package and the prospect of an additional USD3 trillion infrastructure spend is giving investors plenty to get excited about.
Banks are under pressure in Europe. Credit Suisse dropped 10% after warning it could suffer a significant hit to profits as it starts to unwind positions after a hedge-backed client defaulted on a margin call. The forced unwinding of positions also hit Japanese bank Nomura, which tumbled 16%, in its biggest sell-off on record.
Investors are bracing themselves for more volatility in the US when markets open after a USD20 billion fire sale on Friday, triggered by Archegos. The firm has concentrated holdings in Viacom and Baidu, whose shares have been under pressure in recent weeks. These developments certainly raise questions surrounding the rise of margin debt and over-leveraging.
FX – Euro set for worst month in almost two years
The US dollar is edging higher amid growing optimism surrounding the prospects of the US economy. Demand for the greenback has been steadily picking up over recent weeks, boosted by the slight risk-off tone to the markets and by rising optimism surrounding the US economic outlook. With the US vaccine rollout in full swing, the divergence between the USD and particularly Europe is becoming increasingly clear.
While the US vaccine programme powers ahead, the European rollout has been sluggish at a time when we’re seeing a third wave sweep across the region. Compounding the euro’s woes further, interest rate differentials between the German and US yields have widened, favouring the greenback. The euro is languishing below 1.18 and is headed for its largest monthly decline since July 2019.
The focus remains on the Covid situation in Europe. Until we start to see a ramping up in the pace of vaccine rollouts, the euro is likely to remain depressed.
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