Stock rally pauses as focus turns to fresh Covid-19 outbreaks

A sharp rally in global stocks paused on Tuesday, as traders weighed signs of economic recovery with new flare-ups in coronavirus cases in several parts of the world.

European markets fell in early trading, with the regional benchmark Stoxx 600 index down 0.7 per cent and London’s FTSE 100 slipping 0.5 per cent. Futures trading tipped Wall Street’s S&P 500 to open down 0.7 per cent.

Markets have rallied sharply in recent days, driven by upbeat economic data, hopes of a possible vaccine and continued central bank support. But the gains have come as many countries have reported another burst of Covid-19 cases, leading some authorities to reimpose tighter lockdown restrictions.

Equity strategists at Citi highlighted various risks to shares, even while they raised their forecasts for the S&P 500 this year.

“A second wave of debilitating Covid-19 cases would be challenging, not to mention the US elections,” the strategists from Citi said. “But these are not immediate threats, and investors appear to only have short-term timeframes.”

Chinese stocks extended their rally on Tuesday, with traders shaking off concerns that the growing coronavirus outbreak in the US could endanger a global economic recovery.

The CSI 300 of Shanghai- and Shenzhen-listed shares rose 0.6 per cent, taking gains over the past week to 12 per cent. Hong Kong’s Hang Seng index, which entered a bull market on Monday, gave up some of those advances as it slipped 1.2 per cent.

China’s equities market has been supported in recent days by state-run media, which have encouraged the retail trader base to pile in.

There are indications that global investors are also buying into the China rally, traders said. “The market is still relatively cheap so global fund managers have room to increase their exposure,” said Kenny Wen, a strategist at Everbright Sun Hung Kai. “It may have room to go further.”

Overnight, the S&P 500 climbed 1.6 per cent and the tech-heavy Nasdaq closed at an all-time high after traders returned from a three-day holiday. The fifth positive session in a row for US markets came despite a surge in Covid-19 cases, which could dim hopes of a V-shaped global economic recovery.

“My regrets deepen as yet more records are set by names I sold too early,” said Mohamed El-Erian, chief economic adviser to Allianz.

“While regrets go up, my ability to rationalise market moves declines,” he added.

Investors said a furious rally in Chinese shares, which rose 5.7 per cent on Monday for their biggest daily gain since February last year, had rippled across markets and reinforced hopes that a rebound in the world’s second-biggest economy would boost demand for global exports.

Elsewhere in Asia, South Korea’s Kospi index slipped 1.1 per cent, and Japan’s Topix dropped 0.3 per cent.

Australia’s S&P/ASX 200 fell 1.1 per cent. Lockdown restrictions will be reimposed on metropolitan Melbourne from midnight on Wednesday, Victoria’s premier said, following an “unsustainably high” number of new coronavirus cases.

In commodities, gold dropped 0.1 per cent to $1,782.20 per ounce. Crude oil prices were down slightly with Brent, the international marker, 0.9 per cent lower at $42.72 a barrel while US benchmark West Texas Intermediate was down 1 per cent at $40.30 per barrel.

The yield on the US 10-year Treasury note, viewed as a haven in times of market uncertainty, was down 0.2 percentage points at 0.66 per cent, as investors moved into the debt. Yields move inversely to prices.

Additional reporting by Alice Woodhouse in Hong Kong

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