European stocks trade mixed, commodity stocks aid the FTSE 100

European stocks are trading in a mixed fashion on the final day of the week. The upbeat mood on Wall Street, which sent the S&P500 to record highs, failed to inspire fresh highs in Europe. Instead concerns over travel dominated.

The UK government widened its greenlist – the countries that British tourists can fly to without having to quarantine on their return. However, concerns are growing that the changes to the list were still too restrictive to revive the key summer holiday period leaving travel stocks out of favour. Meanwhile in Europe, German Chancellor Merkel, along with French President Macron are backing further travel curbs in order to prevent the delta variant from spreading. Travel stocks across Europe remain under pressure.

The FTSE is outperforming its European peers, thanks to a boost from energy and mining stocks overshadowing weakness in travel stocks. Higher commodity prices combined with a dovish BoE policy are making the UK market an attractive place to invest.

The Bank of England was upbeat on its outlook for the UK economy, but in line with the Fed, the BoE considers that the spike in inflation will be transitory. Let’s not forget that covid cases are on the rise and the furlough scheme will come to an end in Autumn – the UK is by no means out of the woods yet. The BoE remains in wait and see mood with the accommodative policy keeping stocks under pinned.

Looking ahead to the US open, US stocks are pointing to a positive finish to the week after Biden’s $600billion infrastructure deal was agreed, paving the way for investment in roads, bridges and broadband. The deal was less ambitious than what Biden had hoped for and that could explain treasury yields and the US Dollar have remained downbeat this week despite the Fed’s more hawkish stance.

All eyes will now be on PCE data which will almost certainly support the Fed’s hawkish shift. Equities markets are trading quietly ahead of the release.

FX – Euro gains on upbeat German sentiment, USD edges lower ahead of PCE

In the currency markets the Euro is showing some signs of life, extending gains versus the US Dollar for a second straight session. Data revealed that German consumer confidence is set to jump in July. The closely watched GFK data rose to -3, up from -7 in June and ahead of forecasts of -4. As covid cases recede, and the economy reopens optimism is running high which bodes well for a solid start to Q3.

The US Dollar trades on the back foot after Biden’s infrastructure deal boosted risk sentiment, hitting the greenback’s safe haven appeal. However, caution remains ahead of key inflation data. The PCE data will provide further clues as to how much pressure the Fed is under to start tightening policy sooner.

Oil is set to book fifth straight week of gains

Oil prices are on the rise for the third straight session and are on track to book gains of 2.5% across the week. This will mark oil’s fifth straight week of gains. Oil has only lost ground in one week since April 25th.

Both oil benchmarks steeled on Thursday at the highest level since 2018. The fact that oil prices only seem to go up recently highlights the extend to which the demand outlook is outstripping supply. Current fundamentals are supportive of further gains. With economies reopening, fuel demand picking up and this increase in demand being met with limited supply – it screams bull market all the way.

Looking ahead the outlook for oil hinges on the OPEC+ meeting on 1st July. We can expect some consolidation at these levels early next week ahead of Thursday. The OPEC+ group is likely to gradually increase production across the year, which could see the upside limited.

Gold stays in tight range

Gold is edging higher, paring mild losses from the previous session. Gold has traded in a tight range this week within familiar levels sub USD1800 after tumbling 6% in the previous week. Mixed messages from the Fed this week over interest rate expectations has been partly to blame for the choppy trading seen in the precious metal.

Recent US Economic data has been weaker than forecast pointing to a slowing in the economic recovery. Yesterday initial jobless claims and durable goods data came in below expectations offering some support to the precious metal. However, the agreement of Biden’s infrastructure deal has boosted risk sentiment hitting Gold’s safe haven appeal.

Attention will now turn to today’s PCE data, the Fed’s preferred inflation read. Expectations are for a 4% print YoY, up from 3.6%. A strong rise in PCE would support the Fed’s hawkish pivot and could drag Gold closer to USD1750.