Stock markets are ending the week on a negative note after a period of consolidation so far this month.
It’s been a strange start to the year following a bumper two months, with vaccine optimism keeping sentiment upbeat despite the growing near-term Covid risks. The political distraction in the US may have also been a useful distraction for investors, tiding them over to earnings season when corporate America could give new reason for optimism.
There was always a risk though that the spread of the virus and the resulting lockdowns could eventually take its toll and I wonder whether we’re seeing signs of that. The first quarter of the year, while being extremely promising on the vaccine rollout, is shaping up to be far harder than many maybe anticipated, exacerbated greatly by the new highly contagious variants.
It’s something that seemed to be being brushed aside by the markets, with the focus instead being understandably on Q2 and beyond. But at some point, the reality of the current situation may weigh on sentiment and that’s something we could see more of in the coming weeks.
There’s a lot of positivity and optimism priced into these markets and while I still feel they’ll perform well over the course of the year, buoyed by a strong economic rebound, there is scope for a near-term pullback.
Earnings season may offset a portion of that, as we saw following the Netflix results earlier in the week, with tech getting a big lift. Whether that will be enough, we’ll have to see.
UK data weighs on sterling
UK retail sales this morning highlighted the challenge facing the country. Many businesses have adapted fantastically to this temporary reality, but they’re still far from thriving in it. The longer these lockdowns continue – and recent commentary from the government isn’t encouraging on this – the more painful it will obviously be and the more longer-term the damage will become.
The PMI data was no more encouraging, with the services number being hit particularly hard and falling well short of expectations. The combination of these data points has weighed heavily on the pound this morning.
On a more promising note, the speed of the vaccine rollout is cause for encouragement, as is the fact that new cases have been falling for the last two weeks. Any reopening will be done with extreme caution as a result of these new strains but there is light at the end of the tunnel.
