Market Overview

16 June 2021

Does the European Market Set New Targets In Traders' Minds?

The pan-European composite Euro Stoxx 50 index showed its maximum value for the last 13 years on Tuesday, June 15, exceeding the landmark of 4,150 points for the first time since the spring of 2008. This record has not yet been replicated in the course of today's European session, but the stocks are still near record highs. Financial and industrial sectors, and oil companies are among the leaders of today's upside move. 

Taking into consideration the strong current recovery growth, as well as the most likely start of an inflationary spiral in the Old World, following a bright example of the United States, where the consumer price index has already officially reached five percent in annual terms, the growth of European indices may continue for at least the next two summer months. 

The final inflation figures for May in the Euro area as a whole are going to be published tomorrow,  Thursday, and so far they are looking modest on average for all 27 EU countries, supposedly only reaching 0.9% year-on-year. However, the consumer price index of Germany, which is the obvious engine of the European economy, happened to rise by 0.5% over the last month to as much as 2.5%. This follows from the data already published in yesterday's report represented by the Germany's Federal Statistical Office. 

For France, the consumer inflation figure is still only 1.4%, and it may be even lower in some countries which were previously more affected by the outbreak of COVID-19, such as Italy or Spain. However, industrial output prices, or producer price indices, may show outstripping growth there as well soon. After all, this is exactly how it all started in the United States, and in general, the inflationary spiral usually develops in this sequence at the general first stages of post-crisis economic recovery. 

It is worth noting that the German Xetra Dax 30 index and the French CAC 40 index showed more significant spurts up, before they were followed by the pan-European stock indications. Today, the CAC 40 showed another record peak even compared to yesterday's highs near 6,659. And in general, the French stock market is already at its highest levels in as many as 20 years. It was higher, near the 6,900 mark, only once, in August 2000.  

The Euro Stoxx 50 index is still far away from its own records of the early noughties, when it exceeded 5,000 points for some months. However, it seems that the idea of repeating at least the same values above 5,000 points for the Euro Stoxx 50 does not give rest to market bullish crowds, as the example of the French and German indices seems to be contagious or catching. The German stock market generally stands apart from other European markets, since the Xetra Dax 30 is already trading almost twice higher than it was in the distant year of 2000. 

If some traders may still focus at least a little on the example of the American stock exchanges, then the U.S. S&P 500 broad markets are now almost 25% higher, while the high tech Nasdaq 100 is as much as 45% higher than these indexes were traded before the viral crisis in January 2020. By calculating the simplest mathematical approximation, one could assume that price targets above 5,000 points at least for the Euro Stoxx 50 could be achieved, which is only slightly more than 25% higher than the pre-virus levels, and for the CAC40 it could be reasonable to think about some target level around 7,500 points.  

Whether this will eventually be achieved or not, it is clear that no one can know such matters for sure. But it is clear that the liberation of the European economy from a heavy burden of prolonged lockdowns is just beginning, so the economic reality may give acceleration to the markets as well. And as long as the U.S. indices continue to grow, and based on the European own inflation figures, the EU stocks may follow the U.S. path, more slowly or faster, but to their own heights, while many investors may keep in mind some benchmarks similar to those mentioned above. 

The actions of the European Central Bank (ECB) may serve as a very powerful driver or as a constant increase of money flow until the middle of 2022 at least, since the financial regulator has very clearly outlined its position last week. Considering any inflationary spikes this year as temporary, the ECB does not intend to slow down the pace of existing monetary incentives. 

The ECB Chairwomen, Christine Lagarde, just confirmed a total envelope of €1,850 billion until at least the end of March 2022 for the Pandemic Emergency Purchase Programme (PEPP), a monthly pace of €20 billion for the another regular Asset Purchase Programme (APP) for "as long as necessary to reinforce the accommodative impact of our policy rates" plus reinvesting, in full, the principal payments from maturing securities purchased under the APP "for an extended period of time past the date when we start raising the key ECB interest rates". Knowing that the ECB kept its interest rates near zero for the past ten years, which means it was long before the virus crisis, market traders may assume that an "extended period of time" for APP may be kept at least for another three or even five years. 

The ECB shares an opinion that all inflation spikes of this year could be just a "transitory" phenomenon. "Transitory" or not, inflation will be here, even against this background of money pumping. At some points, inflation could be much higher than any of us may realise, as well as the market movements.

 

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.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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