European stocks steady after hitting record highs

European equities and Wall Street futures took a pause on Monday after stocks were propelled to record highs last week by positive economic data, strong corporate earnings and key central banks affirming easy monetary polices.

The Stoxx Europe 600 share index traded flat after hitting an all-time high last week. London’s FTSE 100 was also steady on Monday morning while futures contracts tracking the US’s S&P 500 share index gained 0.1 per cent.

Scotching concerns that high rates of global inflation would dent profit margins, total quarterly earnings by Stoxx-listed companies have beaten analysts’ forecasts by 7 per cent so far, according to Goldman Sachs.

S&P 500 companies have beaten expectations by 10 per cent, on aggregate, according to FactSet. Analysts’ forecasts collated by the data provider suggest year-on-year profit growth will now moderate as a strong earnings recovery from the coronavirus shocks of 2020 fades into the background.

“We’re probably not going to see the same types of returns in 2022,” said Zehrid Osmani, manager of Martin Currie’s global portfolio trust. “Next year is clearly a much lower forecast year for earnings as this year has been one of recovery,” he said, after companies shook off the economic shocks of 2020. “Also, monetary policy will shift from being accommodative to normalising.”

Column chart of S&P 500 earnings growth rates and earnings forecasts, on aggregate, year-over-year   showing Analysts expect US profit growth to moderate from here

Wall Street’s main stock indices ended last week at record highs after monthly jobs market data topped analysts’ forecasts, Pfizer reported positive late-stage trials for its antiviral Covid-19 pill and the Federal Reserve pledged “patience” towards interest rate rises.

By Friday the S&P 500 had closed at all-time highs for seven consecutive trading sessions. It is now 25 per cent higher this year and has more than doubled since the coronavirus-induced market rout of March 2020.

The yield on the 10-year US Treasury note, a benchmark for borrowing costs worldwide, rose 0.03 percentage points to 1.486 per cent as the price of the debt fell. This key debt yield has dropped from almost 1.7 per cent in late October, however, as traders became more relaxed about the timing and pace of future interest rate rises.

Government bonds rallied last week as the Fed made a well-telegraphed move to reduce its $120bn of monthly bond purchases that have lowered borrowing costs since March 2020, while chair Jay Powell said “we don’t think it’s time yet” to also raise borrowing costs. The Bank of England also held interest rates at 0.1 per cent after signalling it was ready to raise them.

In Asia, Hong Kong’s Hang Seng index fell 0.4 per cent and Tokyo’s Nikkei 225 closed 0.4 per cent lower as traders turned cautious at the start of the sixth plenum of China’s ruling party, which is expected to set the stage for President Xi Jinping securing an unprecedented third term.

Xi’s administration has cracked down on speculation in the real estate sector, which economists have calculated accounts for 29 per cent of China’s gross domestic product, contributing to financial pressures on indebted homebuilders such as Evergrande, which has missed interest payments on some bonds.

Other market moves:

  • Brent crude, the oil benchmark, added 1.2 per cent to $83.55 a barrel as sentiment in commodities markets was boosted by US president Joe Biden’s $1.2tn infrastructure spending bill being approved by the House of Representatives late on Friday.

  • European natural gas contracts for December delivery rose 4.3 per cent to €77.2 per megawatt hour as hopes faded of Russia increasing supplies to resolve concerns about shortages.

  • The dollar index, which measures the US currency against six others, traded flat ahead of monthly US inflation data out on Wednesday.

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