IFO Trips Up Euro But Equities Hit All Time Highs

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IFO misses as lockdowns bite
Equities at fresh highs
Nikkei 0.67% Dax 0.02%
UST 10Y 1.08
Oil $52.8
Gold $1855/oz.
BTCUSD $33251/oz.

Asia and the EU
EUR EU IFO 90.1 vs. 98.1

US
No Data

The Euro was hit by unexpectedly weak IFO readings while equity futures opened the week strongly running to fresh all time highs before pausing in morning European trade.

The IFO reading came in at 90.1 versus 91.8 eyed, sending EURUSD lower by 40 pips as traders became concerned that the region now faces the risk of a double dip recession due to lockdowns. According to IFO economist Klaus Wohlrabe retail demand has collapsed due to fresh restrictions as COVID cases have climbed with the services sector also feeling the pain as transport and logistics firms have suffered significant business declines.

One bright spot was manufacturing which continued to recover off global demand, led mainly by China.

Overall, Mr. Wohlrabe painted a bleak picture indicating that Q1 GDP will likely stagnate as COVID takes its toll. The slow rollout of the vaccine in the EU is clearly starting to impact economic activity and the political response remains unfocused. The region is now in danger of succumbing to a bureaucratic morass as both the vaccination plans and the fiscal stimulus disbursements are far too slow for the crisis at hand.

The next month will be critical in terms of investor sentiment. Unless EU authorities can ramp up their vaccination activity and flatten the curve of new infections the region will almost certainly slip into a double dip recession and that in turn could bring back the highly toxic populist politics of the past which could threaten the very foundations of the region.

For now the EURUSD remains above the 1.2000 figure as markets continue to give the EU authorities the benefit of the doubt, but a slip below that key level would be a sure sign that investors are giving up on the prospect of recovery in the Eurozone anytime soon.

In equities meantime, the mood was decidedly more upbeat as futures traded to fresh highs with tech leadden Nasdaq leading the way. This week brings a slew of key earnings reports from MSFT AAPL and FB amongst others and investors will be keen to know how the work from home trade is doing. The tech giants have not only survived but thrived during COVID so forward guidance will be key as to whether the rally can extend or begin to correct into what is generally the weakest monthly period (February) for equities.

Boris Schlossberg
Managing Director

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