Eurozone Foreign Trade; Germany, France, Italy CPI; U.K. Unemployment figures; Joe Biden attends EU-U.S. summit in Brussels; updates from Wacker Chemie, Pirelli, Volkswagen, Ashtead, H&M, Evraz, Equinor
Shares in Europe are likely to push higher for now, with all eyes on the Fed’s upcoming June meeting. In Asia, major stock benchmarks were mixed, the dollar was flat, while bond yields and commodities dipped into the red.
European stocks are likely to extend their rally further into record territory on Tuesday, after the Stoxx Europe 600 closed yesterday’s session with a gain of 0.2%, its seventh consecutive record high.
This follows fresh moves by U.S. investors to advance their rotation into technology and other growth stocks on Monday, pushing the S&P 500 and Nasdaq to new levels.
“Stock markets are by and large around all-time highs. We think there is still more upside there,” said Salman Baig, multiasset investment manager at Unigestion.
Despite the latest market moves, the debate between growth and cyclical stocks continues. Some investors say the market’s path forward hinges on the outcome of the Federal Reserve’s latest two-day policy meeting starting on Tuesday.
Although most investors expect the central bank to keep rates where they are, attention will center on the Fed’s view of inflation and whether it sees any need to accelerate its timetable of interest-rate increases. Higher rates would likely inject a fresh round of volatility into markets, especially growth stocks, which are sensitive to rate increases.
“The Fed’s messaging this year will be critical,” Glenmede strategists said in a note. “The Fed needs to convey its intention to wind down ultra-accommodative policy, but at the same time convey that it has no intention of abruptly tightening policy, a fine line that could easily be miscommunicated.”
The dollar was little changed in Asian trading ahead of U.S. retail sales data. Expectations point to a slight on-month contraction, given that previous readings may have been boosted by the issuance of stimulus checks. However, a positive surprise could support the dollar, said IG.
With the FOMC meeting in focus, investors will be watching for any shift in the dot plot, any revision in the PCE inflation estimate and Jerome Powell’s comments to form an idea of the tapering timeline, said IG.
TD Securities said the Fed’s tone is likely to turn slightly less accommodative at Wednesday’s policy meeting, lifting the dollar.
Mr. Powell will probably admit that the central bank has started to discuss a plan for tapering its bond-buying program, although he will emphasize that this depends on making much more progress towards the Fed’s goals, said TD forex strategist Ned Rumpeltin. “If confirmed, our base case scenario should be USD supportive.”
Sterling could fall if the EU becomes more concrete on its threat to impose retaliatory measures against the U.K. in a dispute over Northern Ireland border checks, said Commerzbank.
“Brexit may have been formally completed, but the end of this vexed issue is not yet in sight for the pound,” said Commerzbank currency analyst Thu Lan Nguyen.
The EU has warned that it could impose tariffs and quotas on the U.K. after the Boris Johnson’s government suggested it could unilaterally extend a grace period that allows the free movement of chilled meats moving between Great Britain and Northern Ireland.
Treasury yields edged lower in Asia after they recovered some of last week’s losses on Monday ahead of this week’s monetary policy meeting, with fixed-income investors closely watching the central bank’s views on inflation.
“A patient Fed could help lower Treasury yields a bit further but we feel that 10-year Treasurys are a bit rich at yields below 1.5%. We still look for yields to be over 2% by the end of the year,” wrote Steve Barrow, head of G-10 strategy at Standard Bank, in a Monday note.
The valuations of U.K. inflation-linked government bonds are looking rich and JPMorgan has advised clients to sell 10-year linkers.
“We see potential for a selloff in intermediate real yields given the strong growth backdrop and expected further hawkish tilt from the Bank of England over the coming months,” said strategists at the bank. Ten-year index-linked gilt real yields–which strip out the effects of inflation–are close to…