European stock indices remained on the front-foot at the time of writing after having opened a touch firmer this morning, with most sectors trading in the positive territory. On the week, though, most indices were still flattish, in what has been a low-key week for macro events. China has now started its week-long Spring Festival, which may hurt trading volumes further. That said, we’ve had plenty of company earnings reports (see below), while US jobless claims data is set to be released later on, with a handful of potentially market-moving UK data to follow on Friday. In FX, the US dollar index was a touch lower, now on its fifth consecutive down day, as the EUR/USD edged higher in a quiet session. Precious metals rebounded slightly, while crude oil was a touch weaker, although holding near its recent multi-month highs.
Europe lags in global risk rally
The ongoing reflation trade has helped to lift some of the global equity markets to new record highs, including in the US and some Asian nations. European indices on the other hand have lagged behind, most notably the UK’s FTSE 100. There is little doubt in my mind that this is due to a rising pound, which continues to find good tailwind support after a no-deal Brexit was avoided and as the UK is currently well ahead of many countries in the race to vaccinate its population. Together, these developments have boosted expectations that the UK economy could potentially recover quicker and stronger once lockdowns end. But the stronger pound has seen the FTSE, whose constituents earn big portions of their profits abroad, underperform. When foreign earnings from these multinational corporations are exchanged for the pound, their profits appear less rosy than they do in dollars or euros. The stronger pound is also negative for UK exports, as it makes UK goods and services appear dearer overseas.
However, with expectations of a strong recovery in UK economy growing, the potential for firmer domestic demand recovery should help UK-listed stocks offset the negative impact of the ongoing exchange rate appreciation. And with UK and global monetary conditions remaining very loose, while fiscal spending is also expansionary, conditions remain favourable for UK stocks. So, the FTSE should, in my view, go higher over time and catch up with the other European indices.
Fed’s printing won’t stop until 2% inflation exceeded
For global markets, investors seem happy to keep buying the dips as they look forward to more US stimulus while expecting that the ongoing central bank bond buying is likely to keep the downside limited for stocks. Indeed, Jerome Powell reminded us on Wednesday that the Fed won't consider slowing QE purchases until 2% inflation is reached – and exceeded. The latest Consumer Price Index (CPI) measure of US inflation missed expectations on Wednesday, staying flat in January. This came as a bit of a surprise to the markets, causing renewed falls for the dollar and bond yields. Meanwhile the ongoing COVID vaccine rollouts will keep hopes that things might be going back to normal soon, alive. Some analysts are expecting pent up demand to cause a strong rebound in global economy once lockdowns end.
European company earnings: more misses than beats
As mentioned, it has been a quiet week for macro data, but the focus has been more on individual names with several big European companies reporting their quarterly results. Unfortunately, there has been quite a few big falls among the top movers. Here are the highlights:
- AstraZeneca saw its shares rise 1.9% after it reported revenue growth and beat analysts' sales estimates. The pharm giant forecast 2021 revenue growth, with the COVID-19 vaccine likely to help the cause.
- Zurich Insurance reported a 20% fall in 2020 operating profit, causing its shares to drop.
- Danone shares rose after investment company Artisan Partners demanded corporate governance and strategic changes.
- Commerzbank fell 7% as the lender said its loss deepened in in Q4, reporting a 2.7-billion-euro loss in the quarter.
- Credit Agricole shares rose 4%, thanks to a strong dividend.
- Saab shares fell 7%, after earnings miss.
- Ted Baker fell 4% as it said trading was hit in the last quarter due the pandemic and warned of higher costs related to Brexit.
- Royal Mail delivered an 8% rise in its shares, thanks to record parcels orders boosting earnings.
- Rexel, the French electrical parts supplier, saw its shares soar due to a strong outlook.
FTSE trying to break short-term bearish trend
At the time of writing, the FTSE was trying to break its bearish trend line, connecting the recent highs. A clean break above the trend line could potentially lead to renewed technical buying interest:
Source: ThinkMarkets and TradingView.com
From here, the next potential area of trouble is around 6620, which was previously support and where the 50% retracement against the recent high comes into play. Above this, there won’t be many major levels until this year’s earlier high at 6960.
On the downside, the 6515 level is the key short-term support to watch on the daily time frame, below which there are not many daily levels until the recent low at 6300/10 area. On the lower time frames, there are additional supports to watch, such as 6455.
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