Europe set for softer open as froth gets blown off some of yesterday’s gains
For the second week in succession global markets have got off to a flier, with the FTSE100 hitting its best levels since June, while US markets put in yet another record close for the Dow and S&P500.
Once again it was optimism over a vaccine that prompted yesterday’s move higher, as Moderna followed in the footsteps of Pfizer and BioNTech a week ago, by announcing that its own vaccine candidate had a 94.5% efficacy rate.
Yesterday’s move higher was slightly more restrained then the turbo charged move just over a week ago, says Michael Hewson, chief market analyst at CMC Markets UK, as he points out this is largely down to the fact that the Moderna news “was not as big a surprise as last weeks’ Pfizer announcement, the results of which more or less came as a bolt from the blue.”
“Nonetheless the change in outlook and tone has been more than palpable, as pessimism about a Covid exit strategy has transformed into unbridled optimism, that we have a pathway to recovery, and multiple possible vaccine candidates,” Hewson tells City PM this morning.
This pathway will no doubt contain the odd pothole in the form of setbacks around further trials, and possible concerns about side effects, which may help explain why markets closed down from their intraday peaks, he added.
Infections are still rising
Despite “this unbridled optimism it is also impossible to ignore the current backdrop” to the vaccine news, Hewson continued, as it is seeing a continuation in the trends of rising infection, hospitalisation and mortality rates, across Europe and the US, with California being the latest US state to pull an emergency brake on 41 of its counties, 94% of its population.
“The fact remains that for all the optimism over multiple vaccine candidates, none of them will be available to offset the problems currently being faced right now, as we head into a long dark winter of trying to keep a lid on the problems being faced in keeping the virus under control, until the weather warms up next year,” he noted.
For Hewson, it was particularly notable that the biggest gains yesterday were in Spanish, Italian and French markets, though the outperformance of the IBEX also had the benefit of some much needed but fairly rare bank M&A activity, which also helped the European bank sector outperform.
Oil prices also got a double boost, one from the optimism over another vaccine candidate, as well reports that OPEC+ will prolong the current production caps.
As we look to today’s European open, and today’s price action in Asia, which saw the Nikkei 225 post fresh 29-year highs, we could see a slightly softer open as some of the froth gets blow on off some of yesterday’s gains.
US retail sales
On the data front markets will be looking out for the latest US retail sales numbers which, in the past few months, have seen very much a V-shaped rebound from the big declines seen in the first part of this year, Hewson said, adding that, since then markets have seen five months of “fairly solid gains with expectations fairly high that we could well see a sixth month of growth.”
“Despite the strength of the rebound in consumer sentiment there are still significant concerns about the US economy, given that there are still over 9m more American citizens out of work than was the case at the beginning of the year,” he adds.
The sharp decline in the unemployment rate to 6.9% ought to bode well as we head into the end of the year, however to some extent it is masking the true state of the US labour market, Hewson concluded.