Stock markets on edge over Delta virus variant, Fed policy

Optimism around a steady recovery has put Stoxx 600 on course for fifth month of gains

Photograph: iStock

Photograph: iStock

 

Global shares inched back from record highs on Tuesday on concerns about new coronavirus outbreaks in Asia undercutting an economic recovery, while investors remained on edge over the United States’ exit from accommodative policy.

European stocks, as measured by the pan-European Stoxx 600 index, were up 0.4 per cent, helped by a jump in industrial, financial and mining stocks, sectors set to benefit from economic improvements.

Optimism around a steady recovery has put the European benchmark on course for its fifth straight month of gains.

In contrast, MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.5 per cent lower as recent positive momentum stalled as some countries re-imposed lockdowns to contain the spread of the Delta variant of the virus.

Japan’s Nikkei fell 0.8 per cent, while in Australia the ASX/200 index closed down 0.1 per cent as increasing Covid-19 curbs across the country dented sentiment. The South Korean market closed 0.5 per cent lower.

Chinese stocks lost 0.92 per cent as investors booked profits after a rally on the back of the country’s strong rebound from the impact of the Covid-19 pandemic.

US stock futures, the S&P 500 e-minis, were flat, while MSCI’s all country world index, which tracks shares across 50 countries, was 0.1 per cent weaker, off record highs scaled the day before.

Delta effect

Fears over the spread of the highly infectious Delta variant are denting sentiment at a time markets are on edge after the Fed shocked traders with a hawkish tilt earlier this month.

Indonesia is grappling with record-high cases, while Malaysia is set to extend a lockdown and Thailand has announced new restrictions.

“The outlook for policy in general and the US specifically, both fiscal and monetary, is the more relevant factor in the market’s mind right now rather than the spread of the Delta variant,” said James Athey, investment director at Aberdeen Standard Investments. “That may well prove to be naive or complacent.”

In Europe, investors were looking to the release of German consumer price data on Tuesday for clues about what they may mean for continued central bank stimulus.

A Reuters poll suggests the figure for June, due out at 1200 GMT, would be at 2.3 per cent, overshooting the European Central Bank’s target for the bloc.

In the US, a closely-watched jobs report for June will be released on Friday. It could sway the Fed’s policy outlook and bring forward expectations for interest rate increases.

“Inflation is already much higher than the Fed was anticipating, so it is really the pace of improvement in the labour market that stands head and shoulders above every other indicator in terms of when the Fed will feel comfortable signalling the start of tapering,” said Ray Attrill, Head of FX Strategy at National Australia Bank in Sydney.

News of a possible bipartisan U.S. infrastructure spending agreement over the weekend helped boost risk appetite on Monday.

On Wall Street, the Nasdaq and S&P 500 had gained 0.98 per cent and 0.23 per cent, respectively, on Monday to hit all-time highs, fuelled by tech stocks as investors bet on a robust earnings season.

Yields for benchmark 10-year US Treasuries edged higher, but below levels of recent days, at 1.4951 per cent. Last week, it notched its largest weekly gain since March.

Germany’s 10-year bond yield was flat at -0.187 per cent, within sight of a recent one-month high.

In currency markets, the US dollar pushed towards three-month highs versus major counterparts. Against a basket of its rivals, the greenback rose 0.14 per cent to 92.003. But many investors stayed on the sidelines ahead of Friday’s jobs report.

Investors are also looking at US consumer confidence data later on Tuesday as well as the Institute for Supply Management’s manufacturing index on Thursday for clues as to where interest rates are headed.

Both the dollar and yen have benefited from some safe-haven demand, driven by concerns over the spread of the highly contagious Delta variant first identified in India.

The euro declined 0.1 per cent to $1.1911, edging back toward the 2-1/2-month low of $1.8470 touched on June 18th.

The British pound slipped back toward a two-month low, weakening 0.2 per cent to $1.3861.

Concerns over renewed COVID-19 lockdowns across parts of Australia hampered the country’s dollar, which fell 0.3 per cent to $0.75580.

Angst over the virus spread also hit oil prices, which slipped for a second day as investors worried about slower fuel demand growth.

Brent crude was down 0.2 per cent at $74.54 a barrel, while US light crude slipped 0.1 per cent to $72.82 per barrel.

Spot gold was 0.6 per cent down at $1,768.10 per ounce. – Reuters