Improving global economic outlook sparks market optimism

First test will come this week, when the US, eurozone, UK and Japan release key PMI data for February

In this photo provided by the New York Stock Exchange, trader Americo Brunetti, center, works on the floor, Tuesday, Feb. 9, 2021. Stocks were slightly lower in early trading on Tuesday, after the major stock market indexes hit record highs the day before. Investors continue to keep their eyes on Washington, where it appears Democrats plan to move ahead without Republican help on a major stimulus bill for the economy. (Courtney Crow/New York Stock Exchange via AP)

Currencies and stock markets have moved higher since my last column, with the US dollar weakening. After hitting two-month highs in February, the US Dollar Index has since cooled off as a risk-on approach has boosted money markets.

With the Covid-19 vaccination supply crunch story taking a back seat, investors are finding a sense of optimism around the improving global economic outlook story.

This coming Friday will be the first test of the year, when several leading economies, including the US, eurozone, UK and Japan, release their flash Purchasing Managers' Index data for the month of February. The PMI is a key early indicator in the measure of activity in both the services and manufacturing sectors.

While the US is expected to show a slight slowdown in both manufacturing and services PMI, the figure will still be deep in expansionary territory (a reading above 50 indicates a pick up in economic activity). Both categories are expected to outperform in the eurozone.

Along with the week-ending PMI data, I will also be watching for US retail sales due out later today, with month-on-month sales forecast to show a strong bounce back after a contraction of -0.7 per cent in December.

We also have the US Federal Reserve meeting minutes due late Wednesday, which will give a deeper view into the thinking of the central bank and its views on inflation, in particular. So far, the Fed has maintained a dovish view on price pressures and it will be interesting to see if that outlook changes even slightly.

Keep an eye out for the progress of US President Joe Biden and his government this week, who have yet to gain support from Republicans to deliver on the $1.9 trillion stimulus plan.

While there is no set date on when the bill will pass, Democrats would want it enacted before the next round of emergency jobless benefits comes to an end in a month's time. Much of the stimulus talk is already priced into the markets, and barring an immediate burst of risk on buying, markets should quickly shrug off the news.

Meanwhile, all eyes are on the British pound, which has rallied almost 3 per cent from its early February lows. After smoking through a couple of key resistance levels, it is trading at near three-year highs above $1.39 levels and is on the verge of my $1.40 target given last time.

The pound has benefited from a weaker greenback and markets are grasping the optimism around the vaccine drive in the UK, where more than 15 million people have been inoculated so far.

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The pound has benefited from a weaker greenback and markets are grasping the optimism around the vaccine drive in the UK

This milestone will no doubt shift the talk towards an economic reopening of the UK, which has also boosted sterling’s prospects in the short term. While I maintain a bullish bias in the pound for the medium to longer term, it may be too premature in the short term to enter longs at such elevated levels and a correction back towards $1.37 would prove to yield more value.

And finally, earnings week continues in the US with a number of companies expected to announce their results.

Walmart will announce its earnings on Thursday before the market opens. Sales are expected to bounce back amid the heightened holiday demand in the fourth quarter of 2020 and investors will be on the lookout for more details on the retail giant's new subscription service Walmart Plus.

The world’s largest retailer is the first in the sector to announce fourth-quarter earnings this season and is expected to set the tone for a retail segment that has largely struggled amid the pandemic.

Canadian commerce giant Shopify will announce its earnings late Wednesday. The stock has rallied hard in 2021 and is up around 30 per cent, but it could see some profit-taking after earnings are announced. Chinese tech giant Baidu will also announce its results after markets close on Wednesday, while high growth digital media player Roku will release its results after the close of trading on Thursday.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti

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