Stocks drop, yields rise, UK GDP -2.9%

Following an upbeat session on Thursday and a positive handover from Wall Street, European stocks are trading sharply lower on Friday. Although indices are set to book gains across the week.

The ink has barely dried on Joe Biden’s signing of the USD1.9 trillion stimulus package and inflation expectations are ripping higher. Treasury yields are once again heading northwards with the 10-year yield returning above 1.60% boosting the US dollar and pulling stocks lower across the board.

Covid concerns in Europe are adding to the downbeat mood. Whilst in the US President Biden has now promised every American a Covid jab before 1st May, in Europe the vaccine shambles appears to be growing by the day.

The UK has got its act together regarding the vaccine. However, that was no help to the UK economy in January. The economy shrank by -2.9% at the start of the year as the economy went into lockdown for the third time. This was down from growth of 1.2% in December but was still ahead of the -4.9% contraction expected.

The data not only laid bare the damage caused Covid but also the hit from Brexit as exports in the UK to the European Union plunged by an eye-watering 40% in January. Whilst teething problems and stockpiling will have accounted for some of this decline there are growing concerns that we could be looking at the start of a very ominous trajectory and one that the City will be keeping a close eye on.

The BoE expects the UK economy to contract by -4% across the first quarter. Given that non-essential retail won’t reopen until 12th April and the ongoing Brexit-related trade issues this seems rather optimistic.

The pound is trading -0.5% versus the US dollar as the bears eye a move back below 1.39. The weaker pound is providing some support to the FTSE which trades mildly in the red compared to a deep selloff in the Dax. The FTSE is also finding support from the lack of tech stocks within the index, as high growth tech stocks are once again coming under pressure amid rising yields. Nasdaq futures are significantly underperforming.

Euro looks vulnerable versus king USD

With Americans set to receive stimulus checks in days, and US consumers in the mood to spend, inflation expectations are ramping up once more. Slightly downbeat US core inflation data earlier in the week calmed nerves briefly. However, now, elevated expectations for the US economic recovery are lifting yields and as we know the Fed aren’t concerned enough to do anything about it.

This is in sharp contrast to the ECB who yesterday announced that they would accelerate bond purchases in Q2. The ECB is not increasing the size of the PEPP but they are front loading which is having a negative impact on the Euro today.

Weak demand for the euro is further compounded by Europe’s almost painfully slow vaccination programme and fears that France and Germany could be heading into a third wave.

EUR/USD is heading lower, trading below its 50 on the 4-hour chart whilst targeting 1.19. A break-through here could open the door to the 2021 low of 1.1836. Any recovery would need to break above resistance at 1.1990/1.20 to open the door to 1.2025.

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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.
Sophie Griffiths

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