Covid concerns hit cyclicals and travel stocks

European stocks are heading lower for a second session, dragged down by oil majors and travel stocks as oil prices declined and Covid cases rose.

Broadly speaking, sentiment is downbeat. The rising number of cases is reminding the markets that Covid remains a risk, despite successful vaccination programmes in some countries. As such, Covid fears are driving a rotation out of cyclicals – stocks that are more closely linked to the health of the economy, such as banks and carmakers – and travel stocks as more flying restrictions are imposed.

The travel sector had its hopes pinned on a reasonable summer period after months of paralysis, but it doesn’t look likely this will materialise. Spain’s economy was also in need of a tourist boost across the key summer months. However, with the UK government moving the Balearics back to the amber list, this is also looking unlikely. Spain’s Ibex is underperforming in Europe, down around 1%

Expectations of more supplies from oil producers following a truce between Saudi Arabia and the United Arab Emirates has hit oil prices, dragging markets lower.

Looking at the bigger picture, stock indices have had a solid rally across the year. Several European indices are trading at all-time highs as we move towards earnings season. No key levels have been breached, suggesting this is nothing more than a technical sell-off before stocks continue to grind higher.

Looking ahead to the US open, US futures are trading mixed. Much like Europe, a rotation out of cyclicals is in play with high-growth tech mopping up demand. Fed Chair Powell’s dovish comments last night have pulled interest rate hike expectations back, favourable for high-growth tech stocks, which are particularly sensitive to interest rate expectations.

FX – Pound edges higher after jobs report

The pound is edging higher versus the US dollar after encouraging UK jobs data. In June, UK jobs and pay recorded the greatest increase since the start of the pandemic as businesses reopened after lockdown. Compared to May, payrolls soared by 365,000 in June, with the most significant gains seen in the service sector.

Unemployment unexpectedly ticked higher to 4.8%, rather than holding steady at 4.7%. However, this number is still being held artificially low as the government’s furlough scheme props up the labour market. The scheme is due to end in September, and with 2.1 million people still on furlough in May, the unemployment figure could tick a good percentage point higher.

The US dollar continues to fall lower following Fed Powell’s dovish comments. Attention will turn to the US jobless claims. Any signs that the recovery in the labour market is stalling could send the US dollar lower.

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.