Stocks drop after gloomy economic reports in Europe

European stocks slid and Wall Street futures pulled back as a rally that wiped out this year’s losses for the main US benchmark fizzled.

The continent-wide Europe Stoxx 600 dropped 1.4 per cent in midday trade, with markets in London, Frankfurt and Paris off by an even greater margin. Germany’s Dax index fell 2 per cent. US S&P 500 futures slipped almost 1 per cent, which points to the large-cap index erasing most of Monday’s gains to bring its performance for the year to a 1.1 per cent decline.

US Treasury bonds rallied, suggesting a rising demand for perceived haven assets. The yield on the 10-year note fell 0.05 percentage points to 0.84 per cent.

Reports released on Tuesday highlighted that, even while equity markets had recovered, particularly in the US, signs of acute strain in the global economy had persisted. France’s central bank estimated that output this year would contract 10 per cent, adding to gloomy forecasts from other big regional economies.

Exports from Germany, Europe’s biggest economy, in April plunged the most on records dating back 70 years. Data from Japan, meanwhile, showed orders for machinery last month fell the most in more than a decade.

Tai Hui, chief Asia market strategist at JPMorgan Asset Management, said global economic activity was “far from where we were before the pandemic”. The nascent recovery faced many threats, he said, such as a second wave of coronavirus infections, US-China trade tensions and the ripple effects of rising unemployment and corporate bankruptcies.

Global equities have recovered from the lows struck in March as stimulus measures from governments and central banks have helped to bolster investor confidence. The slow easing of lockdown measures in many countries, with no major second wave of Covid-19 infection reported, has also bolstered sentiment, analysts have said.

“Equities at these levels are supported by reopening economies and continued monetary and fiscal stimulus,” said Mark Haefele, chief investment officer at UBS Wealth Management. “But the move does increase the importance of selectivity — looking for the stocks and sectors that still have room for growth.”

In Europe, the travel and leisure sector fell more than 2 per cent, squeezed in particular by airline groups IAG and easyJet, which have been under persistent pressure following a plunge in global travel.

Oil prices extended Monday’s sell-off, which was prompted by Saudi Arabia’s admission that the extension of Opec+ production cuts would not include voluntary curbs by a trio of Gulf producers.

Brent crude, the international benchmark, fell 1.1 per cent to $40.34 a barrel while West Texas Intermediate, the US marker, dropped nearly 1 per cent to $37.85.

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