IBEX 35 & Euro Stoxx 50 Talking Points:
- IBEX 35 prices continue to struggle at 8,400 level as Spain begins to contain COVID
- Euro Stoxx 50 shrugs off rising yields, casts eye towards European economic reopening
- ECB’s De Cos content with rising yields as higher inflation expectations reflect success of stimulus
Spanish equities have been mixed recently, as the country looks to turn the corner in the fight against COVID-19. Despite 15% of all pandemic deaths occurring in February, Spanish experts estimate that nearly 20% of the population is immune to the virus. New cases have fallen significantly, from 865 per 100,000 to less than 200 per 100,000.
Spain’s benchmark stock index, the IBEX 35, continues to struggle at the 8400 level, as investors grapple with vaccine rollouts, ECB stimulus, and mixed economic forecasts. Spanish GDP declined by 11.1% in 2020 according to IMF estimates, as virus-induced lockdown measures hit tourism revenues. The IMF has estimated 2021 GDP growth to be 5.9%, leaving the Spanish economy operating well below pre-pandemic levels. Despite the uncertainty in Spain, 2021 looks set to be a year of recovery for one of Europe’s most important economies.
Despite the grim tone surrounding Spain’s economic recovery, the IBEX 35 sits just below post-pandemic highs. Continued progress regarding vaccination and mass-immunity will fuel a swift reopening of the Spanish economy, and progress in other Eurozone countries will once again paint Spain as a prime location for vacations and holidays. Vaccination tailwinds may be enough to fuel a move to post-pandemic highs, as the Spanish economy patiently awaits the return of global travelers.
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IBEX 35 Daily Chart
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The Euro Stoxx 50 index, which lists 50 of the most liquid stocks in the Eurozone, looks set to extend higher in the near-term. The ECB’s path forward is uncertain but ECB policymaker Pablo Hernadnez De Cos warned earlier that the European Central Bank must avoid any premature rise in nominal rates. Nevertheless, bond yields are continuing to rise as global investors bet on higher inflation as a result of extremely loose monetary policy.
Euro Stoxx 50 Daily Chart
Despite being the “blue-chip” index of Europe, the Stoxx 50 has failed to surpass its pre-pandemic high of 3,867. The US contemporary index, the Dow Jones, has surged past pre-pandemic levels as the United States looks set to experience the strongest economic growth the country has seen in decades. While Europe’s recovery appears to be lagging, European corporations will still reap the benefits of a strong reopening coupled with continued easy monetary policy. Strong corporate performance may likely fuel further upside in the Euro Stoxx 50, and could potentially lead the index past March 2020 highs.
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Opinion over the impact of rising yields on risk assets has been mixed in recent weeks. However, yields are continuing to rise along with optimism surrounding Eurozone economic activity. Corporate earnings may benefit from the economic recovery which could outweigh the drag on equities from higher government bond rates. While rising yields normally drag on valuations, optimism and sheer relief for the recovery may outweigh the headwinds that a higher-rate environment presents. Additionally, the Euro Stoxx 50 may also benefit from a rotation from growth to value, given the composition of the index.
— Written by Brendan Fagan, Intern for DailyFX
To contact Brendan, use the comments section below or @BrendanFaganFX on Twitter