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European equities were set to end the week higher after a volatile few days where fears about the Delta variant of coronavirus were then soothed by expectations of continued central bank support for financial markets.
The Stoxx 600 index had its worst session of the year on Monday with a 2.3 per cent drop, as rising Delta infections hit global equities and the oil price. The regional equity gauge rose 0.5 in early dealings on Friday and was up 0.9 per cent for the week. London’s FTSE 100 gained 0.6 per cent.
The dominance of the highly transmissible Delta variant has sparked fears about global economic growth slowing and isolation measures exacerbating the supply chain bottlenecks that have contributed to inflation surges.
Such concerns have been swept aside, however, by strong corporate earnings on both sides of the Atlantic as well as expectations that central banks’ debt-buying programmes will continue to depress bond yields and make equities more attractive in comparison.
“It felt like a very miniature version of the spring of 2020,” said Trevor Greetham, head of multi-asset investments at Royal London, referring to a short-term plunge in global stock markets that was reversed after central banks pledged trillions of dollars worth of monetary support.
“The markets now know if there is a period of [economic] weakness there will be extra stimulus as required.”
US president Joe Biden is expected to reappoint the dovish Jay Powell as chair of the Federal Reserve, while the European Central Bank on Thursday reaffirmed its commitment to keeping interest rates at record lows.
Economists at Deutsche Bank said they now expected the ECB to push back any decision on ending its €1.85tn pandemic emergency bond-buying scheme from September to December.
“But I wouldn’t be surprised if stocks end up being a bit weaker before the autumn,” Greetham said, as the latest Covid wave leads to bouts of indecision about the sustainability of economies reopening and global growth rates flattered by the base effects of last year’s historic recession go from “silly numbers down to strong numbers”.
In debt markets, the yield on Germany’s 10-year Bund was steady at minus 0.417 per cent, around its lowest since February. The 10-year US Treasury yield was also flat at 1.276 per cent. Bond yields move inversely to prices.
The euro was steady against the dollar at $1.1771, close to its weakest since early April.
Sterling fell 0.1 per cent against the dollar to $1.3748, even after data showed retail sales rose 0.5 per cent in June from the previous month in a better result than economists had forecast. The pound has weakened 0.6 per cent this month as traders turned cautious on the UK economy because of soaring Delta infection rates that have worsened the worker shortages and supply chain disruptions already occurring because of Brexit.
In Asia, Tokyo’s Topix share index closed 0.8 per cent higher. Hong Kong’s Hang Seng index dropped 1.6 per cent, dragged lower by technology shares after Beijing stepped up pressure on Chinese internet companies with fines and warnings about explicit material on their platforms.
Brent crude, the international oil benchmark, drifted 0.3 per cent lower to $73.59 a barrel.