The sharp rally in global stocks stalled on Tuesday, as traders weighed signs of economic recovery with new flare-ups in coronavirus cases in several parts of the world.
European markets slipped in morning trading, with the continent-wide Stoxx 600 index falling 1.1 per cent from around one-month highs. London’s FTSE 100 was down 1.3 per cent while futures trade tipped Wall Street’s S&P 500 to open 0.9 per cent lower.
Hopes for a rapid recovery in Europe were dented after the European Commission slashed its growth forecasts for the region’s economy this year after noting that the lifting of lockdown measures had been more “gradual” than first expected.
Markets have pushed higher in recent days, driven by upbeat economic data, hopes of a possible vaccine and continued central bank support. But the gains have come as many countries have reported another burst of Covid-19 cases, leading some authorities to reimpose tighter lockdown restrictions.
Art Baluszynski, head of research at Henderson Rowe, said some investors would have taken profits following the recent gains. This rally ran the risk “of turning into speculation”, he said, adding that “pressure valves” of corrections were likely, particularly as the outlook for corporate earnings darkened.
Still, Mr Baluszynski added that “equities are the only game in town” since central banks are committed to keeping interest rates low and pumping liquidity into financial markets.
Equity strategists at Citi highlighted various risks to shares, even while they raised their forecasts for the S&P 500 this year.
“A second wave of debilitating Covid-19 cases would be challenging, not to mention the US elections,” the strategists from Citi said. “But these are not immediate threats, and investors appear to only have short-term timeframes.”
Chinese stocks extended their rapid rally on Tuesday, with traders shaking off concerns that the growing coronavirus outbreak in the US could endanger a global economic recovery.
The CSI 300 of Shanghai- and Shenzhen-listed shares rose 0.6 per cent, taking gains during the past week to 12 per cent. Hong Kong’s Hang Seng index, which entered a bull market on Monday, gave up some of those advances as it slipped 1.4 per cent.
The renminbi, which trades within a tightly controlled range, strengthened to Rmb7.0225, its highest level against the dollar since March.
China’s equities market has been supported in recent days by state-run media, which have encouraged retail investors to buy stocks.
There are indications that global investors are also buying into the China rally, analysts said. “The market is still relatively cheap so global fund managers have room to increase their exposure,” said Kenny Wen, a strategist at Everbright Sun Hung Kai. “It may have room to go further.”
Elsewhere in the Asia-Pacific region, Australia’s S&P/ASX 200 fell 1.1 per cent. Lockdown restrictions will be reimposed on metropolitan Melbourne from midnight on Wednesday, Victoria’s premier said, following an “unsustainably high” number of new coronavirus cases.
Overnight, the S&P 500 climbed 1.6 per cent and the tech-heavy Nasdaq closed at an all-time high following a public holiday last Friday. The fifth positive session in a row for US markets came despite a surge in Covid-19 cases, which could dim hopes of a V-shaped global economic recovery.
“My regrets deepen as yet more records are set by names I sold too early,” said Mohamed El-Erian, chief economic adviser to Allianz.
“While regrets go up, my ability to rationalise market moves declines,” he added.
Crude oil prices were down with Brent, the international marker, 1.1 per cent lower at $42.62 a barrel while US benchmark West Texas Intermediate was down 1.4 per cent at $40.05 per barrel.
The yield on the 10-year US Treasury note, viewed as a haven in times of market uncertainty, was down 0.1 percentage points at 0.67 per cent, as investors moved into the debt. Yields move inversely to prices.
Additional reporting by Alice Woodhouse in Hong Kong and Harry Dempsey in London