Europe’s rally continues on recovery optimism

European shares are extending gains as recovery optimism keeps boosting stocks higher. Tech stocks are receiving a lift from the rally in US tech overnight, while industrials are being lifted on optimism surrounding a speedy economic recovery in the bloc.

The market has found a sweet spot whereby successful vaccination programmes are allowing economies to re-open and growth to accelerate. At the same time, central banks are still accommodative. That makes it a win-win for equities right now.

All eyes on FOMC meeting

There is only one show in town this week, and that’s the Fed. Investors want to know if the Fed has started to talk about reining in its ultra-loose policy or not. The markets want to know whether the sugar rush that has boosted stocks to all-time highs is coming to an end.

The Fed is unlikely to hurry into a decision now. However, with bond yields at three-month lows and equities at record highs, the Fed has the market where it wants it. As such, there’s a good runway for very gradually introducing the debate surrounding tapering asset purchases. Even if it doesn’t happen tomorrow, it could well happen at the Jackson Hole economic forum later in the summer.

The Dax is hovering around record highs after German inflation confirmed a 0.5% MoM increase in April, in line with forecasts.

The FTSE is also edging higher, lifted by large dollar-earning companies such as Diageo, Unilever and British American Tobacco as the pound falls. However, gains in the index are being capped by delays in lifting remaining Covid restrictions.

Looking ahead, US futures point to an upbeat start after the bell, extending gains from the previous session. The Nasdaq and the S&P hit fresh all-time highs. Meanwhile, the Dow closed -0.25% lower as the rotation out of growth and into value appears to have run its course for now.

Attention will turn to US retail sales, which are expected to show a -0.8% decline MoM in May, after failing to register growth in April with a 0% change in sales volumes.

FX – GBP slumps despite upbeat jobs data

The pound is underperforming its major peers, slipping below 1.41 to fresh session lows. GBP/USD failed to capitalise on earlier gains following the upbeat jobs report.

The UK job market is starting to look up. Unemployment in the UK ticked lower to 4.7% in the three months up to April, in line with forecasts and down from 4.8% in March. While this is excellent news, there are still some clouds on the horizon. Unemployment is expected to pick up in autumn when the furlough scheme comes to an end, but the trend right now is definitely encouraging.

The data also revealed a record surge in workers on payroll in May compared to April as hospitality and entertainment companies raced to hire staff ahead of the indoor opening. Indoor hospitality re-opened on 17 May. However, after Boris Johnson pushed back the full lifting of restrictions for another month, the hospitality sector is certainly not out of the woods yet.

The pound will now look to BoE Andrew Bailey, who is due to speak shortly.

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