Europe-US divergence

Covid weighing on Europe, Yellen/Powell upbeat

Europe is trading broadly lower, extending losses for a second consecutive session as investors keep a close eye on the developing Covid situation. Meanwhile, US futures are heading higher.

While Federal Reserve Chair Jerome Powell and US Treasury Secretary Janet Yellen were upbeat regarding the outlook for the US economy in their testimony before Congress, the near-term outlook in Europe is deteriorating by sharp contrast. This divergence is being reflected in the markets today with European equities in the red, while US futures are pointing to a stronger start.

The major economies in Europe such as Germany, France, Italy and the Netherlands have all taken steps to tighten pandemic restrictions to combat rising Covid cases. Simultaneously, the vaccine rollout in the region has been particularly sluggish and marred by problems and chaos. Meanwhile, the US has seen a rapid vaccine rollout with Biden pledging all adults in America will be inoculated by the start of May.

Attention is now firmly on the virtual EU leaders meeting, where they are set to discuss the third wave of Covid and address the inadequate vaccine programme. Any signs of progress could help boost sentiment surrounding European assets.

The Suez Canal remains blocked by a container ship that ran aground on Wednesday. For now, the markets are taking one of the worst shipping jams in years in stride, despite the fact the canal handles 12% of the world’s traded goods each day. Hopes of a rapid solution are keeping market sentiment steady for now. However, the longer that this goes on, the larger the impact on global trade will be, and the more likely we will start to see the impact on risk appetite.

Looking ahead, US futures are pointing to a stronger start, boosted by Washington’s upbeat assessment of the US economic recovery. The Nasdaq looks set to lead the gains as it plays catch up, after a rotation into cyclicals on Wednesday saw the tech-heavy index close firmly lower.

Attention will be on the flurry of data including US GDP, jobless claims and core PCE for clues over the health of the US economy in light of Powell’s testimony.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Sophie Griffiths

Sophie Griffiths is a market analyst with OANDA, focusing on the UK and Europe. With almost 15 years of experience, she brings with her a deep-seated understanding of the financial markets, providing timely and relevant fundamental analysis across a broad range of asset classes.

Sophie Griffiths

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