European equities on track for best week since November rally

Global equities looked set to cap the week on a strong note, following the confirmation of Joe Biden as the next US president and expectations that his administration will inject more support into the economy.

Europe’s benchmark Stoxx 600 rose 0.6 per cent in early dealings, putting it on track to close the first week of the year nearly 3 per cent higher in its best performance since the vaccine-led rally of early November.

An MSCI index tracking developed market equities rose 0.3 per cent to a fresh record high, supported by gains in Asian markets, and was on track for its best first week of the year since 2018.

Democrats won key victories in Senate run-off elections this week in Georgia, giving the party control of both houses of Congress. That is likely to mean further fiscal stimulus measures to add to the $900bn agreed among lawmakers.

“This is probably the best news for the economy since vaccines were approved,” said Adam Kurpiel, head of rates strategy at Société Générale.

The bullish sentiment has survived the violence that erupted in Washington on Wednesday, when a pro-Trump mob stormed the Capitol and interrupted the confirmation of Joe Biden as president-elect. The incoming president was eventually confirmed on Thursday while Mr Trump finally conceded the election and committed to a peaceful transition of power, which reassured investors.

“The only noise in markets yesterday was a bullish stampede as [they] continued their strong start to 2021,” said Jim Reid, a strategist at Deutsche Bank. Traders “brushed off the violence in Washington to look forward to the prospect of more stimulus and less political volatility under a new administration in less than two weeks’ time,” he said.

Analysts have predicted that a larger stimulus package might usher in inflation in addition to economic growth. That has knocked bond markets, with the yield on 10-year Treasuries climbing a further 0.01 percentage points to 1.08 per cent on Friday, having this week broken above 1 per cent for the first time since the pandemic’s shock to markets.

Line chart of MSCI World price index showing Stocks in developed markets set new record high

The prospect of a “blue wave” following the Georgia results — with the Democratic party holding the balance of power in both houses of Congress as well as the presidency — also paves the way for the incoming president to pursue more policies such as possible corporate tax rises and regulatory changes for Big Tech companies.

US futures indicated that the benchmark S&P 500 index would rise 0.3 per cent when markets open later on Friday, after having hit another record high on Thursday. Gains were seen across the board in US equities in the previous session, despite the violence in Washington.

“Value” stocks — shares judged to be cheap against their earnings or assets, often found in economically sensitive sectors — have performed particularly well this week.

The environment is “more constructive for risky assets and for the reflation trade . . . Value plays are really working very well in this first week,” said Nadège Dufossé, head of cross-asset strategy at Luxembourg-based fund manager Candriam.

But fast-growing tech companies have also rallied.

“Tech stocks are picking up, indicating that the valuation gap between value and growth will take time to converge until such time as the economy gains more traction,” said Sebastien Galy, senior macro strategist at Nordea Asset Management.

Brent crude, the international benchmark, was up 0.8 per cent in early trading on Friday, at $54.81 a barrel. Meanwhile gold, a haven asset, slipped 1.3 per cent on hopes for a sustained recovery in 2021, to $1,888 per troy ounce.

In the Asia-Pacific region, Japan’s Topix closed up 1.6 per cent to its highest point since early 2018 on hopes for further US stimulus measures, while Hong Kong’s Hang Seng climbed 1.2 per cent.

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