European stocks are trading broadly higher on Tuesday for a second consecutive session, as reopening optimism keeps sentiment elevated. As vaccine rates ramp up in the region, confidence is growing over the economic recovery.
News that the European Commission is taking steps to reopen the continent in time for the summer travel season is lifting risk appetite. The region is expected to be accepting holidaymakers from countries with low Covid infections and high vaccine rates by the start of June. This is particularly important for countries such as Spain and Italy, which are highly dependent on tourism. Furthermore, Britain’s expected announcement of a green list for countries that people can travel to is adding further support to travel and tourism stocks.
The European travel and leisure sector is outperforming with gains of around 1.3%. Foreign holidays are looking like they could actually happen this year, lifting demand for travel and tourism stocks, which were severely battered across the crisis.
A similar note of optimism exists surrounding the US economic reopening as many states continue to ease lockdown restrictions. Investors see the light at the end of the Covid tunnel getting bigger and brighter. As a result, investors are more prepared to buy into riskier assets, boosting stocks.
Adding to the upbeat mood, data revealed that UK manufacturing activity hit a 27-year high in April. The manufacturing PMI rose for an 11th straight month, hitting 60.9, ahead of the flash estimate of 60.7 and the highest reading since 1994. New orders surged for a third consecutive month, lifted by the prospect of the economy reopening.
Sell in May?
Looking ahead, US futures are pointing to a softer start after a strong run in the Dow Jones and S&P500 in the previous session. Investors didn’t pay much attention to the sell-in-May adage yesterday, but with stocks hovering around all-time highs, the market is starting to look as if it might be topping. Given the particularly strong run-up from November to April, investors could begin to see this as a good time to reduce exposure. Whether it’s May or not, after a strong six-month run, a period of lacklustre trading could be expected.
FX – US rebounds NFP to direct further movement
The US dollar is rebounding on Tuesday after steep losses in the previous session. While the Fed keeps reiterating its dovish stance, investors are questioning whether the Fed could be forced to raise rates in the case of a roaring economic recovery.
Yesterday’s manufacturing data disappointed, dragging the US dollar lower. Investors will now focus on non-farm payrolls later this week for further clues over the health of the US economy.
The stronger US dollar highlighted weakness in the Australian dollar, which fell sharply despite the RBA upgrading economic forecasts. Despite the improving growth prospects, there are still no signs of monetary policy tightening until 2024, disappointing Aussie dollar bulls.