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European stocks waver after strong second-quarter rally

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European markets had a tepid opening to third-quarter trading as investors weighed further signs of economic rebound in China against a feared rise in tensions with the US.

The continent’s composite Stoxx 600 was close to flat — after recording little change on Tuesday — as investors considered mixed signals from Asia where markets rose on Chinese data that showed a second straight month of expansion in the world’s largest manufacturing sector.

However, the recovery signal came on the same day that Beijing passed a law tightening its grip on Hong Kong, a move that has been condemned by the US, Europe and Australia — as some investors worry about deteriorating relations between the US and China.

The UK benchmark FTSE 100 slipped 0.1 per cent as the country passed the deadline to request an extension to the Brexit transition period beyond the end of this year, and as 100 business figures sent a letter to Prime Minister Boris Johnson to warn that a no-deal exit would be “hugely damaging”.

The cautious start to trading came as investors awaited an early indicator of US employment set to be released later on Wednesday, with S&P 500 futures down 0.2 per cent.

“The new quarter is starting somewhat mixed in the equity markets,” said Sebastien Galy, senior macro strategist at Nordea Asset Management, as investors assess an uneven rate of recovery across different countries.

Hong Kong’s stock market was closed for a public holiday, while China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks climbed 2 per cent on Wednesday. Australia’s S&P/ASX 200 added 0.6 per cent.

The gains followed further evidence that the world’s second-biggest economy is building momentum after the large hit prompted by coronavirus. The Caixin manufacturing purchasing managers’ index — a measure of factory activity in China — came in at 51.2 for June, after also indicating growth in May.

That result “reflected manufacturers’ confidence that there would be a further relaxation of epidemic controls and a normalisation of economic activities”, said Wang Zhe, senior economist at Caixin Insight Group.

The S&P 500 ended second-quarter trading on Tuesday 1.5 per cent higher while the tech-heavy Nasdaq rose 1.9 per cent. That capped off US stocks’ best quarter in more than two decades on the back of a broad rally encouraged by central bank support measures and hopes of a powerful economic recovery.

The gains came despite Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, warning on Tuesday that daily new US coronavirus cases could more than double as western and southern states struggle to get outbreaks under control, saying the country was “going in the wrong direction” on the pandemic.

Oil prices rose, with West Texas Intermediate, the US benchmark, gaining 1.8 per cent to $39.97 per barrel. Brent, the international marker, was 1.6 per cent higher at $41.95 per barrel.

Crude was boosted by a bigger than expected drawdown in US inventories, which could suggest that demand is rising as the economy begins to recover.

The yield on US 10-year Treasuries, which rises as the price of the bond falls, ticked up 0.02 percentage point to 0.674 per cent.

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