European stocks pause as traders gear up for US earnings season

A stock market rally that sent equities to record highs last week paused on Monday as investors held back from placing bets ahead of the start of the US corporate earnings season.

The European Stoxx 600 slipped 0.2 per cent lower in early trades, the UK’s FTSE 100 fell 0.3 per cent and futures markets indicated a soft opening for Wall Street bourses.

On Friday, the S&P 500 and the Stoxx both hit record highs ahead of US quarterly earnings reports that are expected to show the strongest profit growth in two-and-a-half years as the economic recovery from coronavirus unfolds.

Analysts estimate overall earnings for the broad-based S&P 500 index of big US groups will rise 25 per cent in the first quarter, compared with the same time last year. This would mark the biggest increase in profits since the third quarter of 2018, according to analysis by Credit Suisse.

But investors will also scrutinise businesses’ outlook statements for clues about whether coronavirus social curbs, a computer chip shortage and other supply chain logjams are casting a pall over expectations for future earnings growth.

“While policymakers have provided tremendous support for the economy with both monetary accommodation and fiscal stimulus, the lockdowns have reduced supply, destroying it in some cases,” said Michael Wilson, chief US equity strategist for Morgan Stanley. “Earnings season may bring bad news on costs and margins,” he added, particularly with respect to outlooks for the second quarter.

In fixed income, US Treasuries were steady ahead of the first set of a big round of auctions that some analysts worry could prompt further price volatility in the $21tn government bond market. The US government is set to sell $370bn of the debt over the next three weeks, starting on Monday.

Treasury yields, which move inversely to the prices of the securities, have risen sharply during 2021 as investors are poised for a jolt of inflation from President Joe Biden’s stimulus schemes. On Monday, the yield on the benchmark 10-year Treasury was stable at 1.66 per cent, however, as concerns about a ramp-up in bond sales were balanced by comments from Federal Reserve chair Jay Powell over the weekend that signalled no change to the central bank’s supportive monetary policies.

In Asia, Hong Kong’s Hang Seng index fell 0.9 per cent and China’s CSI 300 dropped 1.7 per cent after Chinese authorities levied a record $2.8bn antitrust fine on Alibaba. The ecommerce platforms’s shares rose more than 8 per cent, however, after its executives said this marked the end of the investigation into its exclusivity arrangements with merchants. But other Chinese tech groups now fear increased scrutiny. Japan’s Nikkei 225 closed 0.8 per cent lower.

The dollar, as measured against a basket of currencies, ticked 0.1 per cent higher. Brent crude, the international energy benchmark, fell 0.4 per cent to $62.55 a barrel.

Futures markets indicated the S&P 500 would slip 0.3 per cent in opening trades while the technology-focused Nasdaq Composite would lose 0.2 per cent.