European stocks rally after sharp sell-off

European stocks turned positive in morning trading on Friday, following a sharp global sell-off that was sparked by renewed fears over the impact of the coronavirus pandemic.

The benchmark Stoxx Europe 600 quickly recovered from opening losses to trade up 1.2 per cent. The S&P 500 is expected to rise by 1.8 per cent when Wall Street reopens on Friday.

London’s FTSE 100 staged a turnround to gain 0.9 per cent, after opening 1.2 per cent lower after figures showed the UK economy’s steepest monthly contraction on record.

US and European stocks suffered their worst one-day falls since March. The US benchmark index dropped 5.9 per cent on Thursday, while the tech-heavy Nasdaq Composite fell 5.3 per cent, retreating from a record high.

Investors were rattled by the Federal Reserve’s dire assessment of US economic prospects this week and rising Covid-19 cases in states in the west and south after easing lockdowns.

Robert Carnell, Asia-Pacific head of research at ING, said a surge in coronavirus cases in the US had provided a reality check for markets, which have rallied in recent weeks on the expectation of a V-shaped recovery in economic activity.

Other analysts said the stock market sell-off was driven primarily by investors turning away from equities since they had become overvalued.

“Yesterday’s moves may have been as much about some investors deciding to take some money off the table simply due to the recent stellar performance of equities and this snowballing over the course of the day,” analysts at Rabobank said in a note on Friday.

But Sebastian Raedler, strategist at Bank of America, estimated that European stocks could gain a further 20 per cent by November as coronavirus restrictions ease. “The violent pullback in European equities this week raises concerns that the 30 per cent rally since mid-March could prove unsustainable against the backdrop of a still-weak economy,” he said.

“However, we think the main planks of the positive thesis are still in place: the virus spread in the main euro area economies continues to fade and governments are lifting their lockdowns, which is set to lead to a pick-up in economic activity from depressed levels.”

In Asia, Tokyo’s benchmark Topix index dropped 1.2 per cent, while South Korea’s Kospi shed 2 per cent and Hong Kong’s Hang Seng was 1 per cent lower.

The US dollar slipped 0.2 per cent, to extend a recent sell-off for the haven currency after clawing back some of its losses on Thursday. The flight from equities a day earlier had given upwards momentum to haven currencies such as the yen and even sparked interest in the dollar, said analysts at MUFG.

Oil prices reversed earlier losses to trade positive. Brent, the international marker, gained 0.2 per cent to $38.61 a barrel, after tumbling 7.6 per cent on Thursday after US data showed crude inventories rose to a record high. West Texas Intermediate, the US benchmark, was flat at $36.33.

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