Extending gains to a third consecutive session, European stock markets opened strongly higher on Wednesday following a rally on Wall Street and in Asia. Despite the surge in coronavirus cases remains the main focus for investors in the continent, fresh positive news on Brexit talks, US stimulus negotiations, and vaccination overshadowed investor cautiousness ahead of the outcome of the Federal Reserve meeting due later today. The rally in the global financial markets was triggered by a reported progress towards a deal on fiscal stimulus measures in Washington while speculations about the looming Brexit deal added to the upbeat tone across the globe. As for the Fed, the central bank is expected to sound dovish during the last meeting of 2020 amid the lingering economic uncertainties.
Also on the positive side, fresh economic data pointed to a strong rebound in activity in December. As such, German Manufacturing PMI arrived at 58.6 versus 56.4 expected. Services PMI in Germany rose to 47.7 against 44 anticipated. In France, December flash services PMI arrived at 49.2 versus 40.0 expected while the manufacturing index rose to 51.1 versus 50.1 expected.
Against this backdrop, the UK FTSE 100 index adds 1.10% to 6,585, Italy’s FTSE MIB gains 1.04 percent to 22,163, France’s CAC 40 is up by 1.04% to 5,588, while the German DAX 30 rises by 1.34% to 13,541. US stock index futures are pointing to a higher opening amid the lingering stimulus expectations. Similar PMIs are expected from the US later today and could add to market optimism if the figures surprise to the upside.
In currencies, the dollar came under the intense selling pressure amid widespread market optimism. The euro rallied to fresh long-term tops above 1.2200 for the first time since April 2018 following the unexpectedly strong European PMIs. EURUSD peaked at 1.2211 at the time of writing and was clinging to the upper end of the extended range. Furthermore, the common currency could extend the ascent later today if the economic data out of the United States come in better-than-expected and add to the downbeat tone surrounding the safe-haven dollar. A dovish tone by the Federal Reserve could add to the downside pressure as well.
Meanwhile, Brent crude is little changed on Wednesday, staying firmly above the $50 handle. The prices continue to target the $51 figure and could overcome this resistance if risk-on rally persists in the short term. Oil traders are cheering stimulus- and Brexit-related hopes as well as upbeat economic updates. Later today, the EIA report could point to a rise in US crude oil inventories, but the market reaction will likely be muted as investors are focused on positive global developments at this stage.
Nathan Lambert, Head of Global FX Analytical Department