Key Talking Points:
- US stimulus approval sees cyclical stocks surge
- ECB meeting likely to be focused on the bond market
- CAC 40 and FTSE MIB drift higher as they attempt to reach pre-pandemic highs
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European stocks made the most of the positive sentiment coming out of the US yesterday, with the DAX 30 having its best trading day in over a month as equities saw a rotation from high-value tech stocks to growth stocks, leaving the Nasdaq licking its wounds again.
The approval of further stimulus in the US combined with the improvement of the virus situation in most countries has continued to push further into the reflation trade, which has been supporting cyclical stocks in the last few weeks as an increase in inflation expectations calls for an improvement in economic growth in the next few months. That said, bond yields continue to be in the back of investors’ minds so I expect Central Banks to have a significant influence over equity performance in the coming weeks.
ECB FAILS TO STEP UP BOND PURCHASES
Specifically in Europe, weekly purchasing data showed that the ECB slowed the purchase of bonds for a second week in a row, putting further upward pressure on European yields. The ECB’s holdings of bonds in its pandemic emergency purchase program (PEPP) increased by a net €11.9bn in the week to March 3, down from €12bn a week earlier and below the €18.1bn weekly average since the program started last year.
Traders will now focus on the policy meeting this Thursday where they will pay close attention to Lagarde’s comments regarding the bond market, given that the current message seems to be that the bank is not defending a certain level in the market, damaging their credibility after they have continuously promised to keep financing costs low.
CAC 40 Levels
The French stock index has been trading relatively stable in the last few weeks, with a bullish bias managing to break above the resistance set around one-year highs at 5,840. Momentum continues to be focused on the upside but overbought conditions are showing up again and strong resistance is likely to be found before the CAC 40 can break higher, with the key focus on the 6,000 mark.
But this level would still be below the 2020 highs reached just before the pandemic outbreak so further upside is expected in the short-term. 6,113 would be the level for bulls to aim at in an attempt to close above the pre-pandemic highs, at which point resistance levels become pretty scarce, with the closes area being 6,168, the high since May 2007, and then 6,944, the CAC 40’s all-time high in September 2000. To the downside, strong support remains around the horizontal 5,700 area, followed by 5,628.
CAC 40 Daily chart
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FTSE MIB LEVELS
The last time I talked about the FTSE MIB the Italian stock index had been cashing in as much support as possible given the appointment of former ECB leader Mario Draghi as the new Prime Minister of the country. I’m happy to see that the price has been able to keep a steady pace in recent weeks, avoiding a break lower after its bullish run. The 76.4% Fibonacci continues to be a key area for the index, and I expect this level to hold as key support in the near future as the FTSE MIB continues to drift higher.
The push above 23,670 consolidates the continuation of upside momentum as the index attempts to reach the highs seen pre-pandemic (25,460), although I expect some resistance to appear along the way, with 23,816 as my first bet.
FTSE MIB Daily chart
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— Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin