Global equity markets inched slightly higher on Wednesday as investors weighed the worsening coronavirus pandemic against prospects of more fiscal stimulus in the US.
On Wall Street the blue-chip S&P 500 index rose 0.2 per cent, while the technology-focused Nasdaq Composite finished the day up 0.4 per cent, after both indices faded in the New York afternoon. Bourses were also subdued in Europe, where the German Dax closed up 0.1 per cent and the French Cac 40 finished 0.2 per cent higher.
Expectations of further economic stimulus once Joe Biden enters the White House next week are being balanced against the latest signs of a growing pandemic threat.
The Dutch government has extended the nation’s coronavirus lockdown by three weeks and German chancellor Angela Merkel warned that her country’s strict measures may last another eight to 10 weeks. Japan has declared a “soft” state of emergency in and around Tokyo, while three cities in China’s Hebei province have been locked down.
“We are in the middle of a pandemic that does not have any end in sight,” said Tihana Ibrahimpasic, multi-asset specialist at the fund manager Janus Henderson. “Investors are balancing supportive US fiscal policy and coronavirus vaccines with these further lockdowns, and a cloudy outlook of how quickly the vaccines can be distributed.”
The rollout of the jabs has been slow in France, where an anti-vaccine movement is gaining ground, while Germany’s political parties are arguing over Berlin’s decision to delegate procurement of the shots to the European Commission.
Mr Biden, the US president-elect, has pledged to press ahead with extra stimulus for the world’s biggest economy. Analysts at Goldman Sachs forecast he will add $750bn to the $900bn economic relief package already agreed by lawmakers late last year.
This has raised expectations of economic growth that could feed through to inflation, prompting a sell-off of US government bonds since the start of the year. Yields have reached their highest level since March, in turn lifting the dollar.
But this so-called reflation trade lost momentum on Wednesday, with the yield on the 10-year US Treasury note falling, meaning prices rose. The dollar, as measured against a basket of currencies, was 0.3 per cent higher.
The rally in US government debt accelerated following the auction of $24bn worth of 30-year bonds. Investors absorbed the new supply, which was offloaded at a yield of 1.825 per cent, with ease. The large sale followed a similarly successful auction on Tuesday of $38bn in 10-year notes.
The US Federal Reserve is likely to begin tapering its debt purchases — a big support for the market since the coronavirus crisis — in 2022, according to Jan Hatzius, economist at Goldman Sachs. Stimulus spending meant US core inflation would rise above the central bank’s 2 per cent goal “somewhat more quickly than expected”, he added.
Peter Westaway, investment strategist at Vanguard, said equities were vulnerable to an inflation overshoot “that causes the central bank to throw on the brakes more quickly than is currently priced in”. US stock markets were the most likely to react to such an event, he added, because unlike in Europe and the UK they were “richly overvalued” compared with historic levels.
Oil prices rose on Wednesday morning to hit a 10-month high before paring back gains in the afternoon. Brent crude, the international benchmark, slid 1 per cent to $56.04 a barrel.
Crude prices have, however, rallied by more than 50 per cent since the start of November, buoyed by hopes that the rollout of vaccines would boost transport demand.
Saudi Arabia also pledged this month to cut production by a further 1m barrels a day in February and March to help support the market, though analysts cautioned that renewed lockdowns would eventually derail the rally.
“The oil market seems invincible right now,” said Stephen Brennock at the oil brokerage PVM. “Yet given the near-term risks, it is only a matter of time before we see some profit-taking.”
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