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Accelerating Business Activity and Strong Earnings Help Europe Rebound

Published 2021/05/05, 12:50
Updated 2023/07/09, 12:32

After steep losses in the previous session, European bourses are flying higher today, helped by strong earnings and accelerating business activity in the region. 

Yesterday's sell-off was just the tonic to fire up the bulls, who had been complacent with stocks hovering around all-time highs. Tuesday's declines served as a reminder that valuations are lofty. However, today's strong corporate updates and upbeat PMI data are supportive of further gains. The EuroStoxx trades +1.3%, its best one-day rally in two months.

Eurozone composite PMI data came in at 53.8 in April, ahead of the preliminary 53.7 reading and up from March's 53.2. Meanwhile, the service sector moved back into expansionary territory in April despite the ongoing lockdown in parts of Europe. The services PMI printed at 50.5, ahead of the 50.3 preliminary reading and up from 49.5 recorded in March. The level 50 separates expansion from contraction.

Corporate earnings gave investors further reason to cheer with big names such as Deutsche Post (DE:DPWGn) and Hugo Boss (DE:BOSSn) posting impressive numbers. 

While the Dax is leading the charge higher, the FTSE is giving it a good run for its money. The UK index has retaken the key 7000 level, boosted by heavyweight banks and miners. 

The reopening trade is presenting itself in the commodity space. Commodities such as base metals and oil are surging higher on rising demand expectations. Copper has passed the key USD10,000 psychological level. Rising commodity prices are particularly beneficial for the FTSE, which has heavyweight oil and miners' sectors.

US futures are pointing to a stronger start after steep tech-led losses in the previous session. Investors sold out of high-growth tech stocks on the Janet Yellen-inspired expectation of higher interest rates, even though earning season has been supportive of these high valuations. Yesterday's moves proved the rotation out of growth and into value still has room to run. 

Looking ahead, there is plenty of data such as ADP employment numbers and the ISM services PMI to guide the market ahead of Friday's closely-watched non-farm payroll report.

US dollar rises; data on tap

After a weaker start, the US dollar is on the rise. Investors continue to weigh up comments from US Treasury Secretary Janet Yellen overnight after she hinted that an interest rate increase could be needed to prevent the US economy from overheating before backtracking. While Fed Kashkari poured cold water on tighter monetary policy expectations, there is often no smoke without fire.

There is plenty of data ahead to keep the markets focused. US ADP Employment numbers are expected to show a huge increase of 872,000 new private-sector jobs in April, up from 517,000 reported in March. 

ISM services PMI is expected to show an acceleration from the already elevated 63.7 level recorded in March, while the employment component is also considered a lead indicator towards Friday's NFP.

Oil surges as easing lockdowns boost demand

Oil is on fire. After gains of more than 2% in the previous week, the black stuff has already risen over 4% so far this week. A record fall in US crude inventories and growing optimism that the economic reopening in the US and Europe will drive fuel demand is lifting oil prices higher.

The American Petroleum Institute data showed a draw of 7.688 million barrels in the week ending 30 April. This was a significantly bigger draw than the 2.19 million draw forecast and down considerably from the 4.31 million build recorded in the previous week.

The data underpins expectations that fuel demand is rising as the US and UK as their economies reopen. An accelerating vaccine programme and news that the EC will ease curbs for the summer holiday season point to demand picking up further. 

The oil market appears to have turned a critical corner towards demand normalisation. Rising Covid cases in India and an extended lockdown in Japan will remain on the oil market's radar but show no signs of holding the bulls back for now.

Gold pressurised by Yellen

A stronger US dollar and the prospect of higher interest rates is not a good combination for gold. The precious metal tumbled more than 0.7% in the previous session on the back of Janet Yellen's rate hike comments and is extending those losses today.

The prospect of tighter monetary policy and higher interest rates has been a central focus for the markets over recent months. While Fed Chair Powell's constant reiteration of his dovish stance had started to seep in, Yellen's comments will have undone some of that hard work, regardless of her backtracking.

Attention will now shift to Friday's non-farm payroll numbers for further clues over the health of the US economy and the recovery in the labour market.

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