Market Overview

3 March 2021

European Stocks Surge Ahead Setting Records


As China's industrial activity data failed to inspire the investment community at the beginning of the week, with the Manufacturing Purchasing Managers Index (PMI) at 50.6 only against the estimated 51.1 level by the average Reuters poll's forecast and after topping at 52.1 peak in November 2020, a similar set of indicators in the EU were much more pleasant in market's eyes. Therefore, the European stock indexes have got a real chance to grow faster than their Asian and American competitors, attracting potentially more capital inflows into portfolios consisting of Old World's companies.

Europe has been hit too hard by the corona pandemic. As a result of recent winter-time lockdowns, a growing confidence that the second and the third quarters of 2021 may see the faster pace of growth, has become a cliché, which was often perceived as a kind of wishful thinking. But the Manufacturing PMI in Eurozone as a whole organism came at 57.9 points which looks much better than a record 55.5 indicator of November 2020. A higher level of Europe's manufacturing activity was last seen in March 2018, this looks particularly remarkable on the diagram (see Pic 1).

Pic 1. The levels of Manufacturing PMI in Eurozone for the last 5 years

Source: Investing.com

Meanwhile, the PMI for the German manufacturing sector came at a stratospheric 60.7 height, confirming that Germany remains the engine of the European economy. As a result, the German Xetra DAX 30 composite index added almost 3% compared to the close of last week, and it set a fresh all-time record today in the vicinity of the 14,200 points landmark. This allows some traders to think about further bets on the growth of a wide range of German companies, which may include automakers, or generously subsidised alternative energy sectors. Some banking stocks continue to grow on the increased yield of bonds on both sides of the pond which may provide the additional passive income to the financial institutions as large bond holders. 

By the way, the yield of the U.S. 10-year Treasury bonds jumped up to 1.614% high before the end of February, which is the evidence of less demand on the U.S. assets with a guaranteed income. This means some possible additional benefits not only for expanding global investment in the stock markets, but also specifically in Europe, which is generally seen as the main alternative to the United States, given into account that the pace of China's economy is slowing for a while and the European indicators are improving faster than it was expected.

With higher annual "bonuses" for the purchase of bonds, the demand for them partially recovered, and at the same time, the dollar-euro exchange rate, which had been weakening for many months, also strengthened slightly. But in turn, the growing demand for bonds at this stage immediately led to a decrease in yields to 1.4%, and as a result, demand fell again. After that, yields are starting to move higher probably forming the next uptrend wave one more time (see Pic 2). 

Pic 2. The U.S. 10-Year Bond Yield Overview

Source: Investing.com

The fact is that the yield of bonds in Germany is also growing, but is in a significantly negative area below -0.3% per annum on 10-year bonds. In France, they are approaching zero, although the yield level now is also still negative at -0.09%, as of noon on March 3. This upside move of European bond yields closer to zero, although not yet inside a positive area, also speaks of an alternative in the form of investments in the European stock market, which investors consider as a more attractive choice than before. It may be clearly seen in comparison with almost "dead" investments in non-profitable public debt assets, where investors simply park their money for safekeeping.

As to the overall Euro Stoxx 50 index, only this year's record has been broken so far, but it is probably only a matter of a longer time before the pre-virus levels are broken too. Even in Italy, the Manufacturing PMI came out at a very high 56.9 level vs the previous 2020 peak value of 53.8, which is important as the Italian population and economy were suffering much during the pandemic. The service sector may still be a weak unit, and this hurdle has not yet been overcome. Although just in the same Italy, the speed of recovery of the service sector was high enough in February, with the Services PMI is at 48.8 points, very close to the neutral boundary of 50.0 points, based on surveys of about 450 business executives in private sector Italian companies.

The French Services PMI showed 47.0 points only, but even this was higher than the average expectations of just 45.2 points, which was effective according to local expert polls. In Germany and in the euro area on average, the similar Service PMI index is still quite low, at 45.7 points. Because of this, the restaurant networks, entertainment and travelling companies, for example, may remain undervalued for some time, but they may also begin to gain momentum in advance, which is already happening with Norwegian Cruise Line Holdings stocks (+4.46% yesterday and +37% since the beginning of February).

In a budgetary statement later today, the U.K. finance minister Rishi Sunak is going to announce his plans on how to steer the country through what the government has said will be the final stages of restrictions, while avoiding any further damage to public finances. This may also attract more attention to some British assets. It is the vague prospects of lifting lockdowns that have so far held back the growth of British stock indices, but they may catch up with the handicap later in the coming months.

The potential of the U.S. stocks is somewhat frozen this week on average, perhaps due to concerns about the U.S. labour market data, which would be released on Friday, March 5. However, the specifics are that even weak data may not necessarily be very different from good data in terms of market impact, as the Fed's priorities in targeted employment levels may further convince the markets of the Fed's serious intentions to supply the national economy and the entire global financial system with freshly printed dollars for a long time.


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