European equities dipped from a record high reached on Friday as investors turned cautious ahead of the US Federal Reserve’s latest monetary policy decision on Wednesday.
The Stoxx Europe 600 index fell 0.3 per cent, following declines in Asia driven by a crackdown on education companies in China and jitters about the US central bank moving closer to reining in its pandemic era asset purchases. Futures markets signalled Wall Street’s S&P 500 would lose 0.3 per cent in early New York dealings.
The Fed has purchased $120bn of bonds monthly since last March to support the economy, depressing yields on debt instruments and boosting the appeal of equities.
Economists do not widely expect strong guidance from Fed chair Jay Powell on when the bond-buying programme will be reduced. But Fed officials appear split about when to taper after US consumer price inflation accelerated to 5.4 per cent in the 12 months to June.
“Rhetoric from Fed officials suggest[s] that there is a division among members on the timing, pace and composition of tapering,” ANZ economist Tom Kenny said.
Investors were waiting to see what balance Fed officials put between the economic growth risks presented by the highly transmissible Delta coronavirus variant and the threat of inflation, said Georgina Taylor, fund manager at Invesco. “But the markets are not seeing any big policy shock,” she added.
Government bond prices rose on Monday, however, in response to deep falls in Asian equity markets. China’s CSI 300 share index dropped 3.2 per cent after the Beijing government over the weekend banned academic tuition groups from making profits, raising capital or going public.
The clampdown followed a flurry of antitrust moves against Chinese technology companies. Hong Kong’s Hang Seng index fell 4.1 per cent and South Korea’s Kospi 200 lost 1 per cent.
The yield on the benchmark 10-year US Treasury bond, which moves inversely to its price, dropped 0.03 percentage points to 1.246 per cent. The real yield on this debt, which adjusts the nominal income return for inflation expectations, also hit a record low of minus 1.127 per cent.
Analysts have been surprised by a strong decline in the benchmark Treasury yield from close to 1.8 per cent in March, despite rising inflation rates and Fed officials last month bringing their forecast for the first post-pandemic rate rise forward by a year to 2023.
Some have blamed traders buying back into Treasuries after liquidating overly aggressive short positions taken out at the start of the year. The Fed’s Powell has also in recent weeks soothed rate rise fears by insisting that high inflation was a temporary effect of the economy reopening from shutdowns last year.
“A stagflation view has also got embedded into rates markets,” Invesco’s Taylor said. In this scenario, the new coronavirus strains could crimp global growth rates while central banks kept monetary policy loose and inflation continued to run above trend.
In currencies, the euro was flat against the dollar to purchase $1.1776 after hitting its lowest since early April last week as the European Central Bank signalled it would maintain deeply negative interest rates. The dollar index, which charts the progress of the greenback against major currencies, fell 0.2 per cent.
Brent crude, the international oil benchmark, fell 0.5 per cent to $73.75 a barrel.
Source: Economy - ft.com
