The investor focus will be on the European markets this morning ahead of the release of the flash PMI data for the month of February and more company earnings results. Global equities have eased back from their recent highs this week and unless they stage a rally later today, most indices remain on track for the first weekly loss this month. The investor focus remains fixated on bond yields which continue to rise due to growing expectations that inflation will be returning as the global economic recovery is expected to speed up once lockdowns end, and things start to go back towards normal. Investors expect pent-up demand from households and businesses to replace government spending and central bank stimulus. As a result, they have been selling government bonds, causing their yields to rise. If yields push onwards and upwards from here, then this could put some further pressure on the stock markets. So far, gold has been the market most affected as rising yields increase the opportunity cost of holding onto gold, an asset which pays no dividend or interest, and costs money to store.
Today’s upcoming data releases could impact yields. Stronger-than-expected numbers are likely to boost investor confidence further in a faster economic recovery from the COVID-19 pandemic. So, yields might rise further, which may keep the potential gains in check for stocks. In other words, there is a chance that good news might mean not so good news for stocks going forward as investors price out the prospects of further stimulus. That being said, it is far too early to say for sure if this will be the new trend, for currently investors seem happy to be buying every dip.
European PMIs today’s key highlight
The European services PMIs should remain in contraction territory, below 50.0, due to the current lockdowns, but it will still be interesting to see how business activity has been affected. The manufacturing PMI data will be more important, and analysts expect conditions in the sector to have remained fairly similar to the previous month, and in expansion mode. Any shocking results could undermine equity prices after the major indices retreated from their recent record or multi-year highs this week amid profit-taking and valuation concerns.
Eurozone PMIs will be published at 09:00 GMT, although we will hear from France and Germany earlier. UK PMI numbers will come in at 09:30 GMT.
UK retail sales slump
Earlier, UK retail sales came in well below expectations with a print of -8.2% month-over-month in January versus -0.3% expected. The drop in sales were obviously worse than anticipated but this should have come as no major surprise given that the UK has been in a nationwide lockdown. Indeed, the pound held near its recent highs as investors continue to ignore short-term risks and look forward to the months ahead when the recovery is expected to speed up.
Earnings in focus
On the earnings front, earnings are expected from companies such as French food and beverage giant Danone, car maker Renault and luxury brand Hermes. We will also hear from Italian oil company Eni. From the UK, earnings from NatWest will be the main highlight.
FTSE testing key support area
Retail stocks will be in focus after those disappointing retail sales numbers, but with yields on the rise banks should start to outperform while the recent big gains for crude and copper prices should keep oil majors and commodity stocks in demand. The FTSE was also testing THIS key support area ahead of European PMI data, meaning there was a chance it could rebound again:
However, if the above support area fails to hold and the index goes on to break that bullish trend line, then we could see a deeper correction in the days ahead.