Market Overview

2 June 2021

A Win-Win Situation for the US-Europe Competition

The EUR/USD sideway movements in a rather tight price range seem to have become a zero-sum game. But that is not the case, as both of the two major markets are still deriving benefits and capitalising on their mutual competition. 

The manufacturing purchasing managers index (PMI) for the Eurozone, which is an important indicator of the Old World's business activity, came out at 63.1 points yesterday. This is only two-tenths of a point below the April's record preliminary estimate for April, which was later lowered to a value of 62.9 points after the follow-up revision. However, the figures for May are now final, and so the data on the recovery pace of the industrial sector broke the previous peak of the decade and also for the whole period of PMI observations. Its own absolute record for this indicator was also set in Italy at 62.3 points, while a 64.4 PMI value for Germany was inferior to the "Biblical" 66.6 for March but still very high. 

Among the largest European economies, only industrial PMIs in France and Spain failed to pass the 60.0 points landmark again. Nevertheless, the overall take-away from those PMI releases was so favourable that the Euro Stoxx 50 composite stock index quickly soared to its all-time record within the area of 4,100 points. Even the French CAC 40 followed the good example performing a similar feat to clear the next height above 6,500 points. 

The market situation as it has developed led EUR/USD to 1.2240 first and then above 1.2250 even despite the best possible reply from another side of the Atlantic. A similar manufacturing PMI by Markit was released there at 62.1 level, which is the U.S. national record for the last several years too. And, a similar output was obtained for the U.S. Institute of Supply Management (ISM) manufacturing index but it included some weaker employment component at 50.9 points only with a solid compensation by new orders component at 67.0 points. As a result, the American S&P 500 broad market index spiked but slightly missed the previous record values, although it was very close to the all-time peaks, and then it moved one step back to the habitual area of 4200 points. And "the best is the enemy of the good" principle rocked the currency swing to lead EUR/USD just to 1.2110 before yesterday's close and below 1.2170 today for now. 

It's not exactly a big mess for the Forex market but some volatile distortion of the idyllic upside rally for the single currency may occur. Regardless of the right name of the market process, it is clearly caused by a competition between the U.S. and European economy for the financial inflows. Some investors prefer to still choose undervalued European stock assets, as Europe seems to have just revved into gear after long-lasted lockdowns. But others continue to bet on the already much stronger U.S. market, even despite the temporary shortcomings of the labour market. The Non-Farm Payrolls report from the United States, which is going to be released on Friday, and before that, the PMI business activity data in the service sectors of both continents on Thursday, will probably significantly contribute to this investment tug-of-war and, therefore, the currency and stock market volatility before the end of this week. 

Remarkably higher yields of the U.S. Treasury bonds, which are not jumping any more for now, but are still at 1.6% per annum against negative yields on German bonds or near-zero positive yields on French or Belgian bonds, may also be part of the game. The safe bond market is not too much in demand now when stock markets deliver a super growth and may continue to support even more profits in the nearest summer months after the very positive close of May. And it's difficult to imagine the U.S. Dollar as a traditional safe-haven currency in a role of market favourite until the stock indexes will reach some intermediary height to convert the upside movement into a flat form of correction, at least. But bonds continue to attract some part of capital anyway, and the holders may choose a geographic preference for their money on a day-to-day basis. 

Meanwhile, a tug-of-war between the U.S. and the European stock markets and economics is obviously not a zero-sum game, but a strong win-win cut of cards, as the money inflows alternately operate by rotation for the final benefits of both markets. The growth of indexes on one side creates investment jealousy and naturally pushes competitive flow of greedy money to the other side, with a motivation of just not to miss another round of investment opportunities. Nevertheless, the process also works for the sake of both American and European recovery to the pre-crisis levels of consumption and welfare.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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