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European equities drift lower as surge in Covid cases saps optimism

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European equities struggled for direction on Thursday, after a surge in coronavirus cases in the US and tightening restrictions in Europe held back a rally driven by optimism over vaccines.

The Stoxx Europe 600 index fell 0.2 per cent in the morning, Germany’s Xetra Dax traded flat and the UK’s FTSE 100 dropped 0.6 per cent.

Europe’s region-wide benchmark has gained more than 14 per cent in November, putting it on course for its strongest month on record, while London’s blue-chip index has risen 13.9 per cent.

But investors’ attention “seemed to switch back to the growing Covid-19 contagion in the USA”, said strategists at Credit Suisse.

Investors were torn between “rising optimism about a future world where vaccines reduce the impact of the pandemic, and current data, which shows how the pandemic is making life harder”, said analysts at ING in a research note.

The moves came after Angela Merkel, Germany’s chancellor, said on Wednesday that the nation’s partial lockdown would last until at least December 20 and might be extended into January.

Ahead of the Thanksgiving break for Wall Street on Thursday, the US reported 2,046 coronavirus deaths the day before, the highest daily toll since early May, according to data compiled by Johns Hopkins University.

New daily cases in Texas and California hit record highs while New York reported more than 6,000 coronavirus cases in a single day for the first time in seven months. 

Data released on Wednesday also showed an unexpected rise in US first-time unemployment claims last week to 778,000, fuelling fears the US economic recovery was stalling.

Technology shares were among the best performers in Europe on Thursday morning, as money flowed back to companies set to benefit from coronavirus lockdowns. The economically sensitive energy sector was the weakest performer on the Stoxx 600, while banking and real estate stocks dragged the FTSE 100 lower.

Some fund managers remain broadly positive on equities, with sectors such as travel and industrial production set to bounce back as economies reopen next year.

“The rally has taken a bit of a pause, but it may be a pause rather than a peak,” said Trevor Greetham, investment strategist at Royal London.

Pfizer and German partner BioNTech said this month that their experimental Covid-19 vaccine appeared to be 95 per cent effective, with US biotech Moderna reporting similar trial results for its jab, which had “really been a big game changer”, Mr Greetham noted.

Brent crude, the international benchmark, fell 1.7 per cent to just below $48 a barrel, paring back some gains that pushed the oil price to its highest level since March this week.

With US markets closed, the dollar index traded flat and the spot gold price ticked up 0.5 per cent to $1,814 a troy ounce.

Sterling slipped 0.2 per cent against the dollar, to purchase $1.337, and lost the same proportion against the euro to buy €1.211, as post-Brexit trade talks between the UK and the EU remained deadlocked.

“With just five weeks today until the transition period comes to an end, there’s still no sign of progress on the key issues in the trade negotiations,” said Jim Reid, strategist at Deutsche Bank. “Tensions are mounting.”

Sweden’s central bank announced on Thursday that in order to “give further support in an uncertain time [and] improve the conditions for a recovery”, it would boost its asset purchases by SKr200bn ($23.5bn) to up to SKr700bn and extend the quantitative easing programme into 2021. The krona lost 0.3 per cent against the euro, with one unit of the common currency buying SKr10.1.

Ahead of the European Central Bank publishing the minutes of its latest meeting at lunchtime, the yield on Germany’s 10-year bond, which moves inversely to the price, was steady at minus 0.579 per cent. The euro was flat against the dollar, buying $1.19.



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European markets recover after tech stock fall

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European equities rebounded from falls in the previous session, when fears of a US interest rate rise sent shares tumbling in a broad decline led by technology stocks.

The Stoxx 600 index gained 1.3 per cent in early dealings, almost erasing losses incurred on Tuesday. The UK’s FTSE 100 gained 1 per cent.

Treasury secretary Janet Yellen said at an event on Tuesday that rock-bottom US interest rates might have to rise to stop the rapidly recovering economy overheating, causing markets to fall.

Yellen then clarified her remarks later in the day, saying she did not think there was “going to be an inflationary problem” and that she appreciated the independence of the US central bank.

Investors had also banked gains from technology shares on Tuesday, after a strong run of quarterly results from the sector underscored how it had benefited from coronavirus lockdowns. Apple fell by 3.5 per cent, the most since January, losing another 0.2 per cent in after-hours trading.

Didier Rabattu, head of equities at Lombard Odier, said that while investors were cooling on the tech sector, a rebound in global growth at the same time as the cost of capital remained ultra-low would continue to support stock markets in general.

“I’m seeing a healthy correction [in tech] and people taking their profits,” he said. “Investors want to be much more exposed to reflation and the reopening trades, so they are getting out of lockdown stocks and into companies that benefit from normal life resuming.”

Basic materials and energy businesses were the best performers on the Stoxx on Tuesday morning, while investors continued to sell out of pandemic winners such as online food providers Delivery Hero and HelloFresh.

Futures markets signalled technology shares were unlikely to recover when New York trading begins on Wednesday. Contracts that bet on the direction of the top 100 stocks on the technology and growth-focused Nasdaq Composite added 0.2 per cent.

Those on the broader S&P 500 index, which also has a large concentration of tech shares, gained 0.3 per cent.

Franziska Palmas, of Capital Economics, argued that European stock markets would probably do better than the US counterparts this year as eurozone governments expand their vaccination drives.

“While a lot of good news on the economy appears to be already discounted in the US, we suspect this may not be the case in the eurozone,” she said.

Brent crude, the international oil benchmark, was on course for its third day of gains, adding 0.7 per cent to $69.34 a barrel.

Despite surging coronavirus infections in India, the world’s third-largest oil importer, “oil prices have moved higher on growing vaccination numbers in developed markets”, said Bank of America commodity strategist Francisco Blanch.

Government debt markets were subdued on Wednesday morning as investors weighed up Yellen’s comments with a pledge last week by Federal Reserve chair Jay Powell that the central bank was a long way from withdrawing its support for financial markets.

The yield on the 10-year US Treasury bond, which moves inversely to its price, added 0.01 of a percentage point to 1.605 per cent.

The dollar, as measured against a basket of trading partners’ currencies, gained 0.2 per cent to its strongest in almost a month.

The euro lost 0.2 per cent against the dollar to purchase $1.199.



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Yellen says rates may have to rise to prevent ‘overheating’

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US Treasury secretary Janet Yellen warned on Tuesday that interest rates may need to rise to keep the US economy from overheating, comments that exacerbated a sell-off in technology stocks.

The former Federal Reserve chair made the remarks in the context of the Biden administration’s plans for $4tn of infrastructure and welfare spending, on top of several rounds of economic stimulus because of the pandemic.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said at an event hosted by The Atlantic magazine.

“So it could cause some very modest increases in interest rates to get that reallocation. But these are investments our economy needs to be competitive and to be productive.”

Investors and economists have been hotly debating whether the trillions of dollars of extra federal spending, combined with the rapid vaccination rollout, will cause a jolt of inflation. The debate comes as stimulus cheques sent to consumers contribute to a market rally that has lifted equities to record levels.

Jay Powell, the Fed chair, has said that he believes inflation will only be “transitory”; the central bank has promised to stick firmly to an ultra-loose monetary policy until substantially more progress has been made in the economic recovery.

The possibility of interest rates rising has been a risk flagged by many investors since Joe Biden’s US presidential victory, even as markets have continued to rally.

Yellen’s comments added extra pressure to shares of high-growth companies, whose future earnings look relatively less valuable when rates are higher and which had already fallen sharply early in Tuesday’s trading session. The tech-heavy Nasdaq Composite was down 2.8 per cent at noon in New York, while the benchmark S&P 500 was 1.4 per cent lower.

Market interest rates, however, were little changed after the remarks, with the yield on the 10-year Treasury at 1.59 per cent. Yellen recently insisted that the US stimulus bill and plans for more massive government investment in the economy were unlikely to trigger an unhealthy jump in inflation. The US treasury secretary also expressed confidence that if inflation were to rise more persistently than expected, the Federal Reserve had the “tools” to deal with it.

Treasury secretaries generally do not opine on specific monetary policy actions, which are the purview of the Fed. The Fed chair generally refrains from commenting on US policy towards the dollar, which is considered the prerogative of the Treasury secretary.

Yellen’s comments at the Atlantic event were taped on Monday — and she used the opportunity to make the case that Biden’s spending plans would address structural deficiencies that have afflicted the US economy for a long time.

Biden plans to pump more government investment into infrastructure, child care spending, manufacturing subsidies and green energy, to tackle a swath of issues ranging from climate change to income and racial disparities.

“We’ve gone for way too long letting long-term problems fester in our economy,” she said.



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Senior Fed official in line to lead top US banking regulator

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Michael Hsu, a senior Federal Reserve official responsible for supervising the largest US banks, is poised to become the next acting comptroller of the currency, ending weeks of uncertainty over the US financial regulator’s leadership.

Janet Yellen, the US Treasury secretary, was set to tap Hsu for a senior post at the Office of the Comptroller of the Currency that would pave the way for him to become acting chief, according to people familiar with the matter. The timing of the announcement could not be determined.

Hsu is currently associate director of the Fed’s bank supervision and regulation division.

He has emerged as a more technocratic choice to lead the OCC compared with other possible choices with higher political profiles, such as Michael Barr, a professor at the University of Michigan and former Treasury official under Barack Obama who was a leading contender for the job. Some progressive Democrats have also been pushing for Mehrsa Baradaran, a professor at the University of California at Irvine, to be selected for the job.

President Joe Biden has not yet chosen anyone to permanently fill the post, which requires Senate confirmation. The White House declined to comment. Yellen’s decision to choose Hsu to lead the agency on an interim basis was first reported by The Wall Street Journal.

Through his role at the Fed, Hsu has great familiarity with the health of the largest banks. The mission of the OCC, which is housed within the Treasury department, is to ensure that national banks “operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations”, according to its website.

The Biden administration is expected to take a tougher approach to financial regulation than Donald Trump’s officials, amid concerns that hefty doses of fiscal and monetary stimulus flowing through the US economy as it rebounds from the pandemic is fuelling greater risk-taking on Wall Street.

Blake Paulson, the current acting chief of the OCC, was installed by Steven Mnuchin, the former US Treasury secretary, on January 14, less than a week before he left office.



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