Germany heading for contraction, FTSE pauses for breath

Despite a fresh record high for the S&P overnight, European stocks are subdued on the final day of trading for the week. Concerns over the sluggish vaccine rollout in Europe and its impact on the region’s economic recovery are dragging on risk sentiment, overshadowing a dovish-sounding Fed Chair Powell.

Federal Reserve Chair Jerome Powell has echoed the accommodative tone of the FOMC minutes, released on Wednesday. While he acknowledged economic progress, he stuck to his guns, saying the recovery would be uneven and there is a long way to go. Further confirmation of a supportive Fed sent treasury yields lower, fuelling the rotation back into growth stocks. Tech stocks outperformed, and the S&P surged to an all-time high.

In Europe, a slew of worse-than-expected industrial production readings from across the region has confirmed fears surrounding the health of the Eurozone’s economy. Germany’s industrial production unexpectedly slumped -1.5% in March compared to the previous month, while French industrial output contracted -4.7% instead of expanding by an expected 0.5% forecast.

These figures have come as an unpleasant surprise, casting doubt on hopes that the industrial sector will be the driving force behind the economic recovery in Q1. These numbers pour cold water over first-quarter GDP growth hopes.

The downbeat data comes as the Eurozone struggles to cope with rising Covid cases, a battle that has been intensified by a sluggish and disorganised vaccine rollout. Growing concerns over a link between the AstraZeneca vaccine and a rare blood clot in young people has only added to the confusion surrounding the inoculation programme in Europe.

The FTSE is underperforming today, as it pauses for breath following a stellar week. The UK index is on track to book gains of around 3% this week, well ahead of its European peers, after scaling to levels not seen since before Covid hit. The FTSE has underperformed against its international peers since the Brexit vote, so a catch-up rally was more than overdue.

Looking ahead, US futures are pointing to a mixed end to the week. The tech-heavy Nasdaq is looking towards a softer open after surging over 1% in the previous session. A rebound in treasury yields is taking the edge off growth stocks.

FX – Dollar rises but on track for weekly loss

US treasury yields are climbing higher, clawing back dovish Powell-inspired losses from Thursday and lifting the greenback. Despite today’s gain, the US dollar is still on track to book its worst weekly loss since mid-December. A disappointing jump in initial jobless claims combined with the Fed's confirmation that it has no plans to tighten monetary policy soon has dampened demand for the mighty dollar. The Fed has been clear that it needs to see a sustained and prolonged period of strong economic data to consider shifting policy.

Meanwhile, the pound has been a clear laggard this week, hitting a two-month low versus the US dollar, and is set for its largest weekly decline so far this year. That said, fundamentals for the pound remain mainly upbeat. However, after a stellar first quarter and some concerns over post-Brexit tensions in Northern Ireland, investors are taking their profits off the table.

WTI crude oil struggles below USD60

Oil prices are mildly lower on the day but are set for over 3% losses across the week. Investors continue to weigh up the prospect of increased supply from the OPEC+ group over the coming months against demand concerns as the pandemic tightens its grip in some regions. Europe’s almost indefinite lockdown combined with record Covid numbers in India and Brazil suggest that fuel-demand recovery still has a long way to go.

While data this week has shown that crude stockpiles are on the decline, it’s also shown that gasoline inventories are not. The rebalancing process within the oil market is in progress. However, with the demand outlook recovery expected to be uneven, this is expected to be a long process. For now, crude oil is likely to hover around the USD60 dollar level until we start to see more encouraging Covid developments.

Gold looks vulnerable after weekly rise

With the US dollar and US treasury yields on the rise, gold is once again out of favour today, although it is still on track for a rare weekly gain. Weaker-than-expected jobless claims and confirmation that the Fed won’t be tightening monetary policy any time soon have seen gold bugs reappear.

There is no major market-moving data due to be released in the US session, meaning gold will trade at the mercy of the US dollar and market sentiment. With expectations of a strong US economic recovery, there’s a good chance that the move higher in gold will be short-lived.