European stocks drift as investors await Fed meeting

Government bonds and European equities drifted on Monday as investors balanced expectations of a global recovery from coronavirus with caution ahead of the US Federal Reserve’s latest meeting this week.

The yield on the benchmark US Treasury added less than 0.01 percentage point to 1.570 per cent. Germany’s equivalent 10-year Bund yield was similarly flat at minus 0.259 per cent, hovering at around a two-month high after demand for the haven asset faded with Europe’s long-awaited acceleration of vaccine rollouts.

In stock markets, the regional Stoxx 600 index rose 0.2 per cent, trading just below an all-time closing high it achieved in mid-April. London’s FTSE 100 added 0.3 per cent, while futures markets signalled the S&P 500 would rise just 0.1 per cent at the start of New York trading.

Investors were also holding back on strong bets ahead of many of the world’s largest companies, from General Electric to Facebook, reporting quarterly earnings in coming days.

Analysts expect companies in the S&P 500 to report the strongest quarterly progress since 2018. After the FTSE All World index hit a record high in mid-April in anticipation of this performance, some investors expect global markets to move from applauding recovery to anticipating a slowdown.

“It will be crucial to see whether companies will give strong enough guidance [on the next quarter] to sustain very high valuations,” said Gergely Majoros, portfolio adviser at Carmignac. “The evolution of the economic cycle next year could be a slowing of the recovery, and this would be a difficult transition for investors.”

Governments in major economies have shown increasing confidence about recoveries in global travel and trade, despite a continued surge of Covid-19 cases in India. Europe’s Stoxx travel subsector rose 1.5 per cent after Ursula von der Leyen, European Commission president, told the New York Times in an interview published on Sunday that fully vaccinated US citizens should be able to travel to the bloc in the summer.

Such moves are causing analysts to look ahead to the end of the aggressive and co-ordinated monetary stimulus by central banks.

The Fed, which has bought about $120bn of bonds a month since last March to push down borrowing costs and support financial markets through the pandemic, starts its latest two-day meeting on Tuesday.

Analysts do not widely expect the Fed to discuss raising interest rates or reducing its purchases this month, even after US president Joe Biden unleashed a $1.9tn fiscal stimulus and announced plans to spend a further $2tn on infrastructure. But taper talk could begin as soon as June, according to some economists.

Jay Powell, Fed chair, was likely to say at his press conference on Wednesday that rises in the US’s main interest rate remained “a long way off,” ANZ economists Tom Kenny and Rini Sen commented in a research note. “We anticipate that at the June meeting, should the economy continue to advance at a rapid clip, the Fed will be open to discussing tapering.”

Brent crude, the international oil benchmark, fell 1.3 per cent to $65.24 a barrel as commodities investors reacted bearishly to India’s coronavirus situation. India is the world’s third-largest importer of oil.

The dollar index, which measures the currency against a basket of those of significant trading partners, lost 0.1 per cent to hit its weakest level since March 3.