While the about turn is a welcome respite from the start of the week, the rebound can’t disguise the divergence taking place in various countries when it comes to vaccination levels and infection rates. Despite these concerns travel stocks enjoyed a decent rebound led by cruise lines and airlines.
While the US and UK appear for now to be on top of the virus, it is still running riot in Asia, with India and Japan suffering acutely, while the situation in Europe appears to have steadied for the time being.
This turnaround looks set to see markets here in Europe open higher, ahead of today’s European Central Bank rate meeting.
We’re not expecting too many surprises from today’s April meeting. While the German Constitutional Court has finally ruled on the legality of the €750bn European Recovery Fund, the money has yet to be paid out which means the ECB still remains the only game in town, as it has been for most of the last 12 months, and while Italian Prime Minister Mario Draghi laid out his plans for a €220bn overhaul of Italy’s economy with the proceeds of that fund, it still remains some way away from being disbursed.
The continued delay in rolling out this money, which was agreed over 9 months ago continues to be a bone of contention for a number of EU members, with the delays in rolling it out particularly serious for the likes of Italy, Spain and Greece, who are at risk of losing out on another summer tourist season.
In recent weeks the fall in the euro has offered the ECB a brief respite after the single currency briefly traded as high as the 1.2300 level in the first part of this year.
The ECB’s biggest problem the past few months has been keeping a lid on yields in the face of the sharp rise we’ve seen in longer term US rates, which have had a rising tide lifts all boats' effect on European longer-term borrowing costs.
There are now signs that EU nations are starting to get on top of their own vaccination programs, however they are still well behind the likes of the US and UK in inoculating their populations, and infection rates still remain high.
One saving grace has been the performance of the manufacturing sector which appears to be performing well, though the recent France manufacturing data suggests that all may not be as well here as first thought.
To offset the weakness in the services sector which is continuing to struggle with various lockdown restrictions the central bank expanded its Pandemic Emergency Asset Purchase program in December for the second time in 2020, from €1.35trn to €1.85trn, as well as extending it another 9 months until March 2022.
While this helps buy time, along with the new loan programs in the form of TLTRO’s the ECB’s consensus is already starting to fray with some members of the Governing Council becoming restless when it comes to the time, extent and duration of the PEPP program.
At the last meeting ECB President Lagarde said the bank would step up the weekly purchase program in an attempt to keep a lid on yields, however some members are already calling for the program to end by March 2022, and investors will be keen to see how she navigates any questions on the various diverging views on the governing council over when the program ends.
It is very welcome that the Pandemic Recovery Fund money appears to be closer to being dispersed, however the reality is it still remains several months away. Furthermore only €390bn of the €750bn of the Pandemic Recovery Fund is available in the form of grants, and as such is too low to make much of a difference, with Europe more likely to benefit from the spill over effects of the most recent US stimulus program.
While this certainly helps, it also carries risks, especially if the fairly relaxed attitude being adopted by the Federal Reserve with respect to the rise in global yields, causes yields to rise further. With the damage from the pandemic likely to extend well into 2021, and possibly 2022, Europe is only now showing signs of getting its act together, which means that further flexibility from the ECB will continue to be needed in the months ahead.
At its last meeting the ECB upgraded its inflation forecasts, however the recent jump in headline CPI, particularly in Germany, could start to raise tensions amongst some of the more hawkish members of the governing council. This isn’t likely to complicate policy now, but it could in the months ahead if it remains at its current level of 2%.
Concerns about US inflation appear to have taken a back seat this week, with US 10-year yields down on the week. Last week US weekly jobless claims sank to a post pandemic low of 576k, confounding expectations of a number above 700k, a number that should have sent yields sharply higher but didn’t. Today’s claims numbers are expected to see a modest increase, but only to 610k, as attention starts to turn towards the next payrolls report which is due in just over two weeks’ time.
EURUSD – currently trading between the highs this week at 1.2080 and support at the 1.1980 area. Bias remains for a move towards 1.2150, however a move below 1.1980 opens up the 1.1930 area.
GBPUSD – bias remains for a move higher while above the 1.3860 area. As long as we hold above this area, we can see the potential for further upside, on a break through 1.4020 towards the highs this year at 1.4200
EURGBP – failure to move above the 0.8730 area last week has seen the euro slide back, however while above support at 0.8580, there is a risk of a move back towards 0.8680. Bias remains for a move towards the 0.8530 area, while below the recent peaks.
USDJPY – slipped below the 50-day MA, but still above support at the trendline from the January lows currently at 107.70. If we slip below here we could see a move towards 107.20. Key resistance currently back at the 108.70 level.