European stocks are charging higher, supported by upbeat corporate earnings ahead of the Federal Reserve monetary policy decision later today.
Banks have been the principal focus, with the likes of Lloyds and Deutsche Bank putting out some really strong numbers. Deutsche Bank reported its best quarterly profit in seven years thanks to superb strength in its investment banking division. Meanwhile, Lloyds saw profits of GBP1.4 billion thanks to an improving economic outlook and the release of bad loan provisions.
Bank earnings are doing an excellent job of highlighting the economic recovery, which is boosting risk appetite. However, it’s not just banks that are propping up the mood. WPP, the world’s largest advertising agency, often considered a bellwether, saw net sales growth ahead of target. Clients are ramping up their marketing spend in preparation for the global reopening – another positive signal for investors to latch on to.
Tech earnings, Fed and Biden
Looking ahead, US earnings from Facebook and Apple will be in focus, as well as this week’s two key risk events: the Federal Reserve interest rate decision and President Biden’s first speech before a joint session of Congress.
No change in policy is expected today, so the central focus will be on Fed Chair Jerome Powell’s press conference. While the US vaccination programme continues at a rate of knots and data reveals an increasingly convincing economic recovery, it’s still early days for tapering talk. June’s meeting could be much more significant. The Fed has said it will want to see approximately around 75% of the population vaccinated in order to begin tapering discussions. We’re not there yet, but we could well be by June.
The Fed aside, investors will also be watching for comments regarding Biden’s tax-raising plans when he addresses Congress. Reports of the tax hike have sent stocks lower once before, and any sense that these plans are firming up could hit market sentiment and pull stocks further from all-time highs.
US dollar rises, euro slips on weaker German consumer confidence
The US dollar is trending higher on Wednesday, extending its recovery from a two-month low as investors look ahead to the Federal Reserve’s interest-rate decision.
Meanwhile, the euro trades lower, under pressure from the stronger US dollar and disappointing German consumer confidence. GFK data revealed consumer confidence is set to fall in May to -8.8 points, down from -6.1 points in April. Expectations had been for an increase to -3.5. However, given the current Covid situation in Germany, hopes that lockdown restrictions would be eased and we’d see a revival of consumption have been dampened. While pre-pandemic household consumption had been an important pillar of the German economy, a return to that dynamic looks unlikely in the first half of this year.
EUR/USD trades -0.2% at 1.2070 with all eyes on the Fed. While no change in policy is expected, any hints of tapering could boost the greenback and drag the pair lower.