European equities drop as recovery trades run out of steam

European equities drifted lower on Friday, as investors sitting on strong gains from an economic recovery rally questioned whether there was enough good news on the horizon to push stock markets higher.

The Stoxx 600 index fell 0.4 per cent by late morning in London after hitting an all-time high earlier in the week. The regional equity benchmark has gained more than 20 per cent since November, when global drugmakers announced effective coronavirus vaccines.

Europe’s inoculation rollout has been heavily delayed and the bloc is struggling to contain a third wave of the virus. But share prices of the region’s banking, energy and industrial companies have been boosted by a US economic rebound that is firmly under way, supercharged by president Joe Biden’s $1.9tn stimulus programme.

“The main question on everyone’s minds is where does it go from here,” said Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham.

The devastating spread of coronavirus cases in India, which on Friday reported a world record 332,000 infections over the previous 24 hours, was “taking some frothiness out of the global recovery trades”, said Arnab Das, global market strategist at fund manager Invesco.

Japan was expected on Friday to declare a state of emergency across Tokyo and other major cities in response to a surge in Covid-19 cases. Elsewhere, Michigan in the US is grappling with a rise in infections and Halifax in Canada announced a four-week lockdown on Thursday.

“We are realising that recovery from the pandemic will be less uniform and more staggered than markets anticipated when the vaccines first came out,” Das said.

Arbuthnot’s Perdon said that equities remained “the best destination” for wealth because the US economic recovery was widely expected to cause a jolt of inflation that would erode returns on fixed-interest securities.

Other analysts believe a heavy sell-off in Treasuries in the first three months of the year is unlikely to extend into the second quarter, following assurances from the Federal Reserve that it has no immediate plans to reduce its $120bn of monthly bond purchases that have supported financial markets since last March.

The yield on the benchmark 10-year Treasury, which moves inversely to its price, was steady on Friday at 1.565 per cent. This yield, which has climbed from about 0.9 per cent at the end of 2020, has stabilised since the US last week reported the strongest month in retail sales for a decade.

“You had a Treasuries market where the bias was about as short as it is possible to be,” said Christopher Jeffery, head of rates and inflation strategy at L&G, referring to investors positioning their portfolios and hedging strategies for an asset class to lose value.

“But markets often buy the rumour and sell the fact,” he added. “Trends that have been strong regularly fail to extend on the actual realisation of the numbers.”

In currencies, sterling gained 0.4 per cent against the dollar to $1.389 after data showed UK retail sales soared in March to strongly exceed analysts’ expectations.

The exporter-heavy FTSE 100, which is sensitive to moves in sterling, fell 0.4 per cent.

Following sharp declines on Thursday after reports that the Biden administration planned to raise capital gains tax for wealthy individuals, futures markets tipped the blue-chip S&P 500 index to rise 0.2 per cent at the New York opening bell.

Brent crude futures gained 0.4 per cent to $65.76 a barrel.