Europe traces Wall Street lower despite signs of an economic rebound

After a weak handover from Wall Street, European bourses are trading broadly lower. Indices are shrugging off better-than-expected PMI data and an improving picture in Europe, focusing on potential tax changes in the US instead.

Wall Street experienced its worst one-day session in over a month on Thursday, following reports that the Biden administration is set to propose a 40% capital gains tax for the wealthy. The prospect of a doubling to CGT prompted speculation that many wealthy Americans could sell out of their stock holdings before the rise comes into play.

Follow-through selling is evident in Europe. However, the fact that US futures are once again on the rise suggests that yesterday’s knee-jerk reaction on Wall Street was overdone.

Stocks are on the red in Europe despite mounting evidence of the improving economic picture. The Eurozone composite PMI, a closely watched gauge for business activity, rose to a nine-month high in April. 

The preliminary April composite PMI rose to 53.7, up from 53.2 in March. The data reveals underlying strength in the Eurozone economy and a booming manufacturing sector. The bloc’s economy is teetering on the brink of a startling recovery. This marks a significant turnaround from the first quarter when the region was standing out as the weakest link among developed economies. 

UK PMI data for April revealed roaring comeback inactivity as the UK economy reopened. The manufacturing PMI rose to 60.7, up from 58.9 and ahead of forecasts of 59. Meanwhile, the service sector PMI jumped to 60.1, up from 56.3 in March. This is the first glimpse of how the economy is performing as it flung open its doors this month. The lifting of lockdown brought a surge in activity, with the economy growing at the fastest rate since 2013. The data underscore a rosy picture of the British economy as it emerges from the pandemic.

Pound rises on stellar Retail Sales

Strong PMI data is more evident in the FX markets where both the pound and the euro are capitalizing on the weaker US dollar.

Better-than-expected retail sales data is also underpinning the pound. UK retail sales surged in March, surpassing expectations, as consumers bought online in preparation for the reopening of the economy in April. 

Retail sales jumped 5.4% month on month, well ahead of the 1.5% increase forecast. After months of being locked down, consumers prepared to venture out helped sales increase by shopping online, even before non-essential retailers opened their doors. 

These figures, combined with the stellar PMI data, suggest the UK economy is on the brink of a booming economic rebound. The pound is looking towards 1.39 on the back of the impressive data.

Oil rises but set for weekly losses as India covid cases hit a new record

Oil prices are edging higher at the end of the week, boosted by reopening optimism in the US and Europe. While surging Covid cases in India and new lockdown restrictions in parts of Japan are keeping any gains in check.

Investors are managing to move past the shocking Covid headlines from India and the build-in crude inventories reported earlier in the week. Instead, they are taking solace in the sustained improvement in gasoline demand. Furthermore, the Covid picture in Europe appears to be taking a turn for the better as schools in France are set to reopen, marking an important step towards reopening the economy.  

Despite the move high at the end of the week, oil prices are still on track for more than 2% losses across the week as a whole. Gains in oil are likely to remain capped until India and Japan, as the third and fourth-largest oil consumers turn a corner in their battle against the virus.

Gold set for weekly gains as Treasury yields remain depressed

Gold is licking its wounds after falling lower in the previous session. The precious metal slipped -0.5% lower on Thursday on the back of a stronger US dollar. Better-than-forecast US jobless claims and reports that the Biden administration is considering raising capital gains tax for wealthy individuals to 40% boosted the greenback in the previous session. As a result, the US dollar-denominated gold came under pressure.

Even so, gold is still on track to book gains across the week thanks to depressed Treasury yields. After what feels like months of the Fed insisting that any near-term rise in inflation is expected to be temporary, it finally appears that the market is buying into the dovish verse. The benchmark 10-year Treasury yield has fallen significantly over the last three weeks from a 1.74% hit in March to 1.55%. Next week’s FOMC will provide further clues.