Vaccine-led recovery versus virus concerns

After a gloomy start to the week, the mood in the market has seen a marked improvement. Following a strong close on Wall Street, European bourses are playing catch up, adding to gains in the previous session.

After a Covid scare at the start of the week, the reopening trade is back in play. Corporate updates have broadly helped draw investor attention away from rising Covid cases in Asia and focus on a more encouraging outlook.

The swings that we are seeing in the market this week reflect the fact that investors are grappling with many conflicting factors. There are significant differences over the vaccine rollout and Covid caseloads globally. India is hitting grim milestones on an almost daily basis, and Japan is also on the brink of lockdown. Meanwhile, corporate America and Europe are showing signs the economic recovery is broadly on the right path.

The FTSE, while trading higher, is lagging behind its European peers, dragged down by heavyweight energy shares. After a recent break out over 6800, the rally in the FTSE has stalled at around its current levels.

In the US, futures are pointing to a flat start, consolidating gains after an impressive session on Wednesday.

In addition to the barrage of earnings due, attention will also be on US jobless claims. Last week claims fell to their lowest level since the start of the pandemic. This week claims are expected to show an increase of 617k, up from last week’s 576k.

Will Lagarde boost the euro?

The FX markets are trading quietly ahead of the ECB rate announcement. The central bank is not expected to move on policy, particularly given the busy March meeting.

Last month, the ECB said it would be frontloading its asset purchase programme. Since then, the picture in the bloc has started to improve. Covid cases are declining, the vaccine rollout is accelerating, and business optimism is improving. Altogether the outlook is rosier. The ECB’s Christine Lagarde is likely to acknowledge that, which could give the euro fresh legs for a run higher. However, Christine Lagarde is likely to stop short in following the BoC’s lead towards tapering.

Yesterday the BoC became the first central bank to start discussing a raise in interest rates, bringing the date of the first hike forward to the second half of 2022.

Heading towards the ECB announcement, EUR/USD trades a few pips lower in muted trade at 1.2025. A more upbeat sounding ECB could lift the pair back towards 1.21. However, too much caution from Christine and Co. could see 1.19 come back into target.

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