Europe Is on the Mend

By Matthew Klein | Friday, May 21

Europe’s Turn to Shine. The world’s second largest economy was hit hard by the spread of a new Covid-19 variant, a botched vaccination rollout, and new shutdowns. But things are finally looking up. The proportion of Europeans getting vaccinated each day has surpassed the rate in the U.S., and the share of European adults who have received at least one dose is fast approaching U.S. levels.

It's starting to show up in data. IHS Markit’s latest survey of purchasing managers at European manufacturing and services businesses, released today, show that growth is returning—and fast. The index of new orders hit its highest level since June 2006. That’s led to a surge in backlogs, with the number of uncompleted orders rising to its highest level “since that series began in November 2002.” Similarly, businesses’ optimism about the year ahead is also at its highest level on record.

Meanwhile, the U.K. and U.S., which had a head start on  vaccinations, are continuing to accelerate. In the U.K., the composite output index hit its highest level on record, implying “the fastest rate of growth since the index was first compiled more than two decades ago.” Similarly, the U.S. readings imply “an unprecedented expansion in business activity in May” thanks to “the fastest service sector upturn on record” with manufacturing new orders rising at the sharpest rate on record.

But while the strong data from the U.S. was already baked into stock prices, the news out of Europe was not. That may help explain why the STOXX Europe 600 index gained 0.6% on Friday while the S&P 500 fell 0.1%. 

But that’s just one day’s performance. The bond markets have been following this story for over a month. Longer-term U.S. Treasury yields peaked at the end of March and have since dropped by about 0.1 percentage point. Over the same period, German Bund yields have increased by about 0.2 percentage point.

Outside of the tech sector, U.S. stocks did relatively well, with both the Dow Jones Industrial Average and the Russell 2000 index of small cap shares up about 0.3%. But that aggregate number reflects sharp declines in tech shares even as 279 of the index’s components rose. At the sector level, the biggest winners were financials, utilities, industrials, materials, and energy, while the worst performers were technology, consumer discretionary, and communication services. Gold, silver, copper, and bond yields were all down slightly, while oil was up.

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DJIA: +0.36% to 34,207.84
S&P 500: -0.08% to 4,155.86
Nasdaq: -0.48% to 13,470.99

The Hot Stock: Ford Motor Company +6.7%
The Biggest Loser: V.F. Corporation -8.9%

Best Sector: Financials +1.0%
Worst Sector: Technology -0.6%