After a mixed start for European stocks, things turned positive just before mid-day with US futures also climbing. Futures on the small-cap Russell 2000 Index outperformed. On a more micro level, airlines and cruise operators were among the leaders in Europe, while defensive stocks fell. In FX, the safe-haven Japanese yen fell noticeably, sending the likes of the USD/JPY and EUR/JPY sharply higher. The other major haven currency – the Swiss franc – also rallied, with the EUR/CHF extending its advance for the 7th consecutive day.
In other words, the reflation trade was back in full swing after tech shares were dumped on Tuesday
amid early signs of taper tantrums. As I mentioned then, the decline in tech stocks and rise in value stocks, along with the rallying copper and crude oil prices, suggested to me that investors were merely rotating into assets that are expected to do well in an improving economy. So, it was more of a rotation story than of stocks topping out. And that’s how it proved to be as the latest dip was bought. That doesn’t mean things won’t turn ugly again, but Tuesday’s price action continues to show how insatiable the appetite for risk is at the moment. Still, valuations are sky-high for US equities and if and when major central banks start tapering talks, then we may see a sharp decline. So, investors should not be reckless or deceived by markets at extremely high levels.
But for now, the bulls remain largely in control. The number one reason why stocks and other risk assets are continuing to push higher is this: cheap central bank money and government stimulus. The Federal Reserve Chair Jay Powell vowed to support economic growth on Tuesday by maintaining the central bank’s current policy stance, and dismissed the idea of early withdrawal of QE. This same message was echoed by the RBNZ overnight. We will undoubtedly hear similar things from other major central banks in the coming weeks.
Signs of reflation trades were evidenced elsewhere too, with copper trading at almost a 10-year high; crude oil holding near recent highs, and the Australian and New Zealand dollars touching their best levels since 2018, despite the RBNZ sounding less hawkish than expected. Bond yields remain elevated with Japanese 10-year yields holding at highest since November 2018, while German Bund yields have so far posted their largest monthly gain in three years. Bitcoin and other cryptos were making a comeback after Tuesday’s plunge.
In terms of economic data and individual company news:
- The German economy grew by a stronger-than-expected 0.3% in Q4 2020.
- The Reserve Bank of New Zealand said tightening of policy won’t happen any time soon as it left rates unchanged as expected. The NZD rallied regardless, as investors figured that keeping policy loose for longer means that the resulting economic rebound could be stronger.
- Europe's biggest hotel group Accor – the owner of Ibis and Novotel – reported an annual loss of €2 billion because of the scale of devastation from the pandemic. But its shares rose as Chief Executive Sebastien Bazin said that Accor was “ideally positioned to benefit from the recovery” amid hopes on vaccine success.
- Reckitt Benckiser was flat after the consumer goods maker posted its strongest sales in history last year.
- Lloyds reported a sharp profit fall for 2020, but as it resumed paying a dividend the fall in its share price was limited to just 1.5%.
- Metro Bank shares tumbled nearly 10% as it posted a much bigger annual loss than expected, saying it expects defaults to rise through the year as government support measures wind down.
- Tesla shares were higher by 4% in premarket at the time of writing. Ark Invest’s Cathie Wood bought shares more than $120 million in the electric carmaker during Tuesday’s selling.
FTSE joins rally
Earlier, things were looking quite mixed for Europe as a strong pound held back the FTSE, while the likes of the DAX and other mainland European indices were pushing higher, thanks in part to upbeat German GDP print, which came in at + 0.3% vs. 0.1% expected. But as the pound eased off the highs, the FTSE also turned higher.
The index is now looking quite bullish again after the re-test of the breakout area between 6515 and 6620 held:
Source: ThinkMarkets and TradingView.com
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