Global markets trade on distinct macro news

Concerns over rising inflation and a renewed surge of coronavirus cases, notably in Europe, impacted global financial markets last week, and continued to do so this week.

Major European indices traded lower on Wednesday, with Germany’s DAX declining by 0.8% and France’s CAC 40 dropping 0.3%, respectively. Following Tuesday’s declines, the regional Stoxx Europe 600 was flat on Wednesday, while London’s FTSE 100 marginally recovered yesterday (+0.2%) after closing lower on Tuesday.

A plausible reason for this downward market movement, predominantly includes investors’ reaction to the possibility that a number of European countries, might follow Austria, and re-introduce tougher restrictions to combat the recent dramatic increase in the number of coronavirus cases across Europe. Apart from the continuous spread of the pandemic, another possible reason relates to investors’ fears over the upcoming US monetary policy.

For instance, Germany re-implemented stricter measures this week, while France recorded more than 30,000 new daily infections on Tuesday for the first time since August. Also this week, Netherlands has hit a new weekly record of new infections.

Notably, we have seen a mixed day of trading on Tuesday, as US technology stocks extended their losses from the previous session, with the tech-heavy Nasdaq Composite index registering declines.

Sector returns varied widely within the S&P500 index. The divergence in sectors moved in tandem with treasury yields, which resulted in bank stocks gains, as the natural hedge of higher inflation kicked-in, while tech-oriented stocks and other high-growth companies continued their slide.

Meanwhile, stocks rose marginally and short-term government debt prices dropped on Wednesday. The S&P 500 gained 0.2% on Wednesday, while the technology-focused Nasdaq Composite was up 0.4% after an earlier drop.

The shifts in financial markets have been predominantly driven by comments from top FED officials in recent days, as some policymakers have pushed for tighter monetary policy in the face of the current inflation scenario.

Apart from banks, other cyclical sectors were also in demand, such as mining stocks gaining around 1% or more on Wednesday, while worries over new restrictions to fight a fourth wave of virus infections, sent travel stocks to February lows.

Additionally, the US president Joe Biden, authorised the resale of 50m barrels of oil from the country’s remarkable stockpile on Tuesday. Notably, this move is deemed by many as an attempt to drive down petrol prices whilst simultaneously playing down a crude oil market rally which would ultimately pose a significant threat to the global economic recovery.

Crude oil prices rallied to $78.4 a barrel during the trading session on Wednesday, from the $75.4 level on Monday. In furtherance, oil and gas stocks were the leading sectorial gainers on Wednesday after the U.S. release of strategic reserves fell short of expectations, triggering a further bounce in crude prices.

Moving to other news, Jerome Powell, who notably has guided the Federal Reserve (FED) and the US economy through the sudden COVID-19 recession, by implementing an unprecedented monetary stimulus, has been nominated for a second term as chairman of the US Central Bank.

The announcement was made earlier this week by the US president, with Biden further stating that given the current economic scenario, stability and independence are required to continue combatting the current economic climate.

In announcing such decision, Biden praised the FED for its continuous decisive actions throughout the past months. Specifically, at the onset of the pandemic, the FED introduced a number of lending programs whilst also cutting interest rates back to almost zero, and instituting a monthly bond-buying program, otherwise known as tapering.

This article was issued by Andrew Fenech, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.