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Reflation trade buoys European stocks

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·3-min read
In this photo illustration, a collection of British ten and twenty pound sterling banknotes are seen displayed. (Photo by Dinendra Haria / SOPA Images/Sipa USA)
A collection of British ten and twenty pound sterling banknotes are seen displayed. Photo: Dinendra Haria / SOPA Images/Sipa USA

European stocks rose on Wednesday afternoon, buoyed by optimism about the reopening of economies.

Stocks dipped briefly after stocks opened lower on Wall Street but major markets across Europe were positive by 3.30pm in London. The best performer was the Germany's DAX (^GDAXI), which rose 0.5%.

"After a mixed start for European stocks, things turned positive just before mid-day with US futures also climbing," said Fawad Razaqzada, a market analyst at ThinkMarkets.

"Airlines and cruise operators were among the leaders in Europe, while defensive stocks fell. In other words, the reflation trade was back in full swing."

Reflation is the term for the stage in an economic cycle when both growth and inflation are accelerating. It usually occurs when economies are recovering from a recession.

Razaqzada said investors were moving their money into stocks primed to do well once vaccines are rolled out and economies begin to reopen.

Earlier in the day, the FTSE 100 (^FTSE) had underperformed as a runaway pound sterling hit share prices on the index.

Sterling is on its longest winning streak against the dollar (GBPUSD=X) rise 2015 and hit $1.42 on Wednesday morning, marking a fresh three year high for the currency.

Pound hit three-year high against the dollar in early trading hours on Wednesday. Chart: Yahoo Finance
Pound hit three-year high against the dollar in early trading hours on Wednesday. Chart: Yahoo Finance

The pound is now the best performing G10 currency against the dollar so far this year. Analyst at Bank of America said the currency was being buoyed by a "perfect storm" of factors: a resolution to Brexit; an impressive rollout of COVID-19 vaccines; and inflation fears in the US, which are denting the dollar.

"The UK government’s announcement of a plan to ease restrictions and open up the economy over the coming months provided a supportive backdrop for the currency," said John Fahey, a senior economist at AIB.

READ MORE: Lloyds Bank profits crash 70% due to pandemic but dividend returns

A strong pound is bad for companies that make their earnings in dollars or other overseas currencies, which covers the majority of the FTSE 100.

However, the pound had retreated to trade flat by lunchtime and the FTSE responded by rising 0.2% on the day. British Airways-owner IAG (IAG.L) topped the index with a gain of 4%.

Shares in Lloyds Bank (LLOY.L) rose 2.5% in London after the bank reported better-than-expected earnings and announced the maximum dividend possible dividend under current Bank of England rules.

In the US, the S&P 500 (^GSPC) was flat, the Dow Jones (^DJI) was up 0.3%, and the Nasdaq (^IXIC) was down 0.6%.

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Asian markets sold-off overnight. Japan's Nikkei (^N225) sank 1.6%, the Shanghai Composite (000001.SS) dropped 2%, the Shenzen Component (399001.SZ) fell 2.4%, and the KOSPI (^KS11) declined by 2.4% in South Korea.

The worst hit was the Hong Kong Hang Seng (^HSI), registering a fall of 3%. Investors hit sell after the city said it would raise stamp duty tax on share transactions.

"Hong Kong’s Financial Secretary Paul Chan has proposed raising this stamp duty to 0.13% from 0.1% to boost revenue in his budget speech, which includes counter cyclical measures such as spending vouchers of HKD 5,000 for each resident and HKD15 bn of guaranteed loans for those without jobs," Jim Reid and his team at Deutsche Bank wrote in their morning note.

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