Europe traces Wall Street lower despite signs of an economic rebound

After a weak handover from Wall Street, European bourses are trading broadly lower. Indices are shrugging off better-than-expected PMI data and an improving picture in Europe, focusing on potential tax changes in the US instead.

Wall Street experienced its worst one-day session in over a month on Thursday, following reports that the Biden administration is set to propose a 40% capital gains tax for the wealthy. The prospect of a doubling to CGT prompted speculation that many wealthy Americans could sell out of their stock holdings before the rise comes into play.

Follow-through selling is evident in Europe. However, the fact that US futures are once again on the rise suggests that yesterday’s knee-jerk reaction on Wall Street was overdone.

Stocks are on the red in Europe despite mounting evidence of the improving economic picture. The Eurozone composite PMI, a closely watched gauge for business activity, rose to a nine-month high in April.

The preliminary April composite PMI rose to 53.7, up from 53.2 in March. The data reveals underlying strength in the Eurozone economy and a booming manufacturing sector. The bloc’s economy is teetering on the brink of a startling recovery. This marks a significant turnaround from the first quarter when the region was standing out as the weakest link among developed economies.

UK PMI data for April revealed a roaring comeback in activity as the UK economy reopened. The Manufacturing PMI rose to 60.7, up from 58.9 and ahead of forecasts of 59. Meanwhile, the service sector PMI jumped to 60.1, up from 56.3 in March. This is the first glimpse of how the economy is performing as it flung open its doors this month. The lifting of lockdown brought a surge in activity, with the economy growing at the fastest rate since 2013. The data underscores a rosy picture of the British economy as it emerges from the pandemic.

Pound rises on stellar retail sales 

Strong PMI data is more evident in the FX markets where both the pound and the euro are capitalising on the weaker US dollar.

Better-than-expected retail sales data is also underpinning the pound. UK retail sales surged in March, surpassing expectations, as consumers bought online in preparation for the reopening of the economy in April.

Retail sales jumped 5.4% month on month, well ahead of the 1.5% increase forecast. After months of being locked down, consumers prepared to venture out helped sales increase by shopping online, even before non-essential retailers opened their doors.

These figures, combined with the stellar PMI data, suggest the UK economy is on the brink of a booming economic rebound. The pound is looking towards 1.39 on the back of the impressive data.

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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.