Europe hits record highs, US dollar hits monthly lows

Earnings, Covid boost European equities

European stocks edged ahead to fresh record highs in early trade before momentum slowed. Strong corporate earnings, the continued rollout of Covid vaccines and the promise of easy monetary policy for longer has driven demand for equities to all-time highs.

Markets are broadly upbeat about the prospects for the global economic recovery ahead of a full week of corporate earnings and the ECB rate decision on Thursday. There have been some impressive moves on the stock markets and now investors want to see these backed up by data.

The FTSE has surged some 8.7% so far this year, hitting a fresh yearly high and the FTSE 250 has struck a new record high thanks to the rapid vaccine rollout and the reopening of the economy.

The FTSE 100 is managing to outperform some of its European peers, despite the stronger pound. Usually, a firmer pound hinders the more internationally focused FTSE 100 index owing to the less beneficial exchange rate for the majority of its constituents.

House builders and miners are underpinning gains, as metal prices rise on the back of a weaker US dollar and house prices jump as the mini housing boom in the UK continues.

Whilst economic data is in short supply today, things will start to pick up as from tomorrow.

A barrage of UK data, starting tomorrow with employment figures, followed by inflation data on Wednesday and PMIs and retail sales at the end of the week will give investors plenty to sink their teeth into to assess the progress of the economic recovery.

Looking ahead, US futures are pointing to a slightly weaker start after record gains reached last week. Earnings reports ramp up this week with Coca-Cola and IBM in focus today ahead of Netflix, Johnson & Johnson and United Airlines tomorrow. The upcoming earnings and forward guidance will allow investors to gauge whether the recent rally has overshot or whether there is more wind in the sails.

US dollar trades around monthly lows

The US dollar is heading lower, extending losses from the previous week. The greenback trades at monthly lows as it traces US treasury yields lower. US treasury yields are trading at the lowest level in 5 weeks.

The market appears to have heard the Fed’s message that any rise in inflation will be temporary loud and clear. Frequent reassurance by the Fed over the past few weeks has sunk in. The market no longer expects an earlier move by the Fed to tightening policy.

With little in the way of data to direct the FX markets, sentiment is in the driving seat. The risk-on mood in the market is adding to the US dollar’s woes.

Easing concerns over the EU vaccine programme, in addition to the weaker US dollar has helped the euro has cross above the key 1.20 level. Euro investors will look ahead to the ECB meeting later this week.

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