European stocks outshine US peers on earnings optimism

US stock markets were outshined by European equities on Tuesday as investors continue to keep a watchful eye for Friday’s jobs data and become increasingly concerned with the spread of the contagious Delta variant of the coronavirus.

The blue-chip S&P 500 and technology-focused Nasdaq Composite were flat late afternoon in New York, after both indices hit new all-time highs a day earlier.

Among the most closely watched releases this week will be the US non-farm payrolls data on Friday, which is expected to show American employers adding close to 700,000 jobs in May, up from 559,000 in the previous month.

The jobs data coupled with increased concerns surrounding the Delta variant are beginning to “dominate market activity and causing us to be in a little bit of this . . . market lull”, said Edward Perks, chief investment officer of Franklin Templeton Investment Solutions and president of Franklin Advisers.

“Another weak jobs report may really raise the question . . . do we have a problem enticing workers, whether that’s unemployment insurance or just a mismatch of job skill to where job openings are, or have people left the labour force.”

The Fed is saying that it is being more data dependent and data should be improving over coming weeks and months

The pan-continental Stoxx Europe 600 closed up 0.3 per cent, led by sectors viewed as beneficiaries from an economic recovery, such as consumer cyclicals, basic materials and energy stocks. Germany’s Xetra Dax rose 0.9 per cent.

“We are still seeing a reactivation of European economies, and earnings this quarter are going to be great, with strong base effects given the weak position we were in this time last year,” said Roland Kaloyan, head of European equity strategy at Société Générale.

Companies on the Stoxx 600 are expected to report aggregate earnings growth of more than 50 per cent in 2021 compared with 2020, according to forecasts collated by the data provider FactSet. S&P 500 companies are expected to achieve 37 per cent earnings growth.

US and Asian investors, who have been sellers of European stocks in recent years, have been buying them this year, said strategists at Goldman Sachs.

Foreign investors were now the largest owners of European equities purchased through mutual funds, Goldman wrote in a research note.

“The Fed is saying that it is being more data dependent and data should be improving over coming weeks and months,” said Kevin Thozet, portfolio adviser at the fund manager Carmignac.

The dollar index, which measures the greenback against major currencies, rose 0.2 per cent on Tuesday as jitters increased about the Fed’s next move. The euro slipped 0.1 per cent against the dollar to $1.1904, taking the single currency’s fall to 2.6 per cent this month.

“The dollar is pricing in a very easy ECB for a longer time, and a more hawkish Fed,” said Sonal Desai, chief investment officer for fixed income at Franklin Templeton.

Dollar-denominated gold, hit by a strengthening greenback, fell as much as 1.6 per cent on Tuesday to $1,749 an ounce, its lowest level since mid-April.

The yield on the benchmark 10-year US Treasury note, which moves inversely to its price, was flat at 1.48 per cent. This yield approached 1.8 per cent in March, but has been pinned lower by a widespread view that surging US inflation, which erodes the real returns from fixed-interest securities, is set to moderate.

“I am less sanguine than the market on inflation,” said Desai, pointing out that the Fed this month lifted its own forecasts for price rises. “But if we see it dropping on a month-by-month basis then perhaps the Treasury market has some rationale at current levels.”

Brent crude, the international oil benchmark, gained 0.4 per cent to $74.95 a barrel.

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