The markets have started the new week on a cautious note this morning. European stock indices were noticeably lower, led by the German DAX and Spanish Ibex indices. Meanwhile, US index futures were mixed with the Dow and Russell futures slight weaker, while the S&P 500 futures were higher. The tech-heavy Nasdaq 100 futures were noticeably higher, up 1% at the time of writing. In FX, the dollar was mixed, falling against some commodity dollars like the New Zealand dollar and rising against the likes of the euro and pound. Gold and silver were higher as bond yields slipped.
Although you can’t ignore the weakness in European markets, it is important not to read too much into today’s price action, as bigger and more meaningful events are happening later in the week.
European market weakness could be short-lived
In Europe, stocks have been held back somewhat by some tempering in the vaccine optimism due to the delays. Here, airlines are providing a drag on UK travel restriction concerns, with IAG for example starting the day 6% lower. But I reckon the falls will be limited in Europe and sentiment will turne positive towards stocks again. With a Brexit deal secured and COVID vaccines being rolled out (with relative success in the UK), investors are likely to look through the short-term economic risks arising from the current lockdowns. In fact, there has been a bit of good news as the number of people catching the virus has fallen in parts of Europe, albeit from exceptionally high levels. The so-called R rate for UK was estimated to be between 0.8 and 1 on Friday, meaning the outbreak is now shrinking if the official estimates are correct. But there is still a long way to go. Lockdowns are unlikely to end until deaths start falling and in any case until more people are vaccinated.
In the US, meanwhile, the prospect of an extra $1.9 trillion in fiscal stimulus has helped to keep equities elevated. The Biden administration will have to work hard to head off Republican concerns that the spending is excessive. Some Republicans want the focus to be on vaccine distribution rather than handing out more cash. US investors are also in bullish mood ahead of the big tech earnings coming up later this week.
Big week for US corporate results, quieter week for macro data
Meanwhile, today’s economic and earnings calendars are quiet, but things will pick up from tomorrow. Among others, we will have quarterly results from big tech giants Microsoft, Apple and Tesla this week, as well consumer companies, providing us invaluable insights about the health of consumer and business spending. While the earnings calendar is quite busy, there is not a lot on the agenda for macro investors this week. Still, there are a handful of macro events and pointers to keep a close eye on, including the Fed’s policy decision and press conference (Wednesday), as well as US GDP and unemployment claims on Thursday.
HERE is our full preview of the week ahead.
Gold and silver rebound as yields fall
Following last week’s central bank meetings, yields have fallen back as investors realise that although the chances of fresh stimulus are slim, ongoing bond buying is not going to end any time soon. As a result, gold and silver have rebounded today and were threatening to break through some key resistance levels.
Bond yields unlikely to rise significantly
There has been a subtle upwards shift in benchmark 10-year government bond yields since the start of the year. Specifically, it has been the European yields starting to catch up after yields in US, Australia and New Zealand had all started to perk up from around November. But today, European and global bond yields have fallen back, reflecting concerns that the pandemic won’t be over any time soon.
The recent rebound in yields suggest bond market investors are no longer expecting any further stimulus from major central banks. This makes some sense as the ongoing vaccine rollout means the pandemic and lockdowns can, hopefully, be declared over at some point later this year. We have also secured a Brexit deal while a massive European Union fiscal package is forthcoming. The need for the ECB, Fed and BoE to continue offering as much support is thus diminishing.
However, to suggest bond yields will stage a sharp rally – or bond prices will sell-off sharply – is very premature. While yields can stabilise further, it is worth remembering that they sit near historically low levels and central banks will be keen to keep them low for a long time to come.
In other words, conditions remain ripe for equities to continue outperforming, especially if the rollout of vaccines, or removal of the lockdowns, happen faster than expected. For FX investors, the positive signals from the equity market will likely keep haven currencies depressed, allowing the likes of the euro and pound to following the commodity dollars higher over time.