Markets rally pauses as investors assess pace of economic recovery

A broad rally in global markets stalled on Tuesday, as investors assessed hopes for a rebound in economic activity in the coming months.

Stocks gave back early gains to turn lower in Europe, with the FTSE 100 down 0.6 per cent and Germany’s Dax 0.4 per cent lower. Futures trade pointed to losses of 0.2 per cent for the S&P 500 when trading opens on Wall Street later on Tuesday.

Markets shot higher on Monday as investors welcomed several developments that boosted hopes for a strong economic recovery once lockdown curbs were lifted.

Germany and France joined forces to push for a €500bn EU recovery fund, boosting the effort to create a co-ordinated European fiscal response to the crisis.

The spreads between Italian, Spanish and Portuguese 10-year bond yields and their German equivalents tightened following the news, which strategists at Rabobank said could “have potentially huge ramifications” in terms of liability sharing in the eurozone.

“There is still opposition within the EU, and the scale is relatively small. Markets are focusing on the principle rather than the scale, however,” said Paul Donovan, chief economist at UBS Global Wealth Management.

Also on Monday, biotech company Moderna said its potential Covid-19 vaccine had delivered positive results in early small-scale human trials. The news helped global markets record their best session since early April, as the European Stoxx 600 regional benchmark index rose 4.1 per cent, while the S&P 500 on Wall Street gained 3.2 per cent.

Still, analysts at Rabobank warned that it would be some time before there was clarity on both the Covid-19 vaccine and EU recovery fund, but that stocks had still welcomed them as though they were “already with us”.

US 10-year Treasury yields slipped 0.023 percentage points to 0.7192 per cent on Tuesday, as investors moved back into the relative safety of government debt.

Expectations for an economic rebound from the pandemic, in part due to robust support measures by major central banks, have helped drive a sharp rise in global stock markets over the past two months. The S&P 500 is up about a third from a low in late March.

“Equities are pricing in an optimistic path forward,” said strategists at ClearBridge Investments, noting that investors had started to focus on the potential path of the economic recovery.

The positive sentiment spilling over from Monday’s trading helped overshadow growing concerns over a US-China rift, with Huawei emerging as a significant source of tension. In the latest development, the Chinese telecoms equipment maker has warned that new sanctions from Washington put its survival at stake.

In the Asia-Pacific region, Hong Kong’s benchmark Hang Seng index rose 1.9 per cent, while China’s CSI 300 index of Shanghai and Shenzhen-listed stocks added 0.9 per cent. Japan’s Topix index climbed 1.8 per cent and Australia’s S&P/ASX 200 rose by the same margin.

Oil prices also built on a rally spurred by signs that crude demand was picking up and supply cuts led by Opec had begun to take effect.

West Texas Intermediate, the US marker, rose 2.9 per cent to $32.70 a barrel after jumping 8 per cent a day earlier and back above the $30 mark for the first time since mid-March. Brent crude, the international benchmark, advanced 0.2 per cent to $34.90 a barrel.

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