European stocks pull back from highs as doubts are cast on recovery

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European equities dropped on Tuesday after the bloc’s fragile economic recovery from the pandemic was called further into question by a survey suggesting that bank lending in the bloc was declining.

The Stoxx Europe 600 index fell 1.1 per cent, dragged down by financial services businesses as well as tobacco stocks, which were hit by reports that the US government may cap nicotine levels in cigarettes.

European lenders may restrict access to credit in the second quarter of this year, according to a European Central Bank survey released ahead of its next monthly meeting on Thursday.

“This reflects banks’ uncertainty regarding the severity of the economic impact of the third wave of the pandemic,” the ECB said.

During recent months, some analysts have criticised the ECB for not doing enough to combat the recession. The central bank has committed to spend €1.9tn on bonds, stepping up its purchases in recent weeks, but its separate €750bn pandemic recovery fund, agreed last year, has been held up by legal challenges by German Eurosceptics.

Economists fear policymakers may not communicate strongly enough how they plan to soften the blow from the health crisis. “We do not expect to hear anything inspiring” from the ECB after Thursday’s meeting, said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam.

Analysts at Bank of America echoed this view in a research note, forecasting “no additional guidance for the months ahead” from the ECB on Thursday. This, they said, could leave “room for market jitters ahead of the June meeting” while “the risk of a hawkish policy mistake can’t be ruled out”.

London’s FTSE 100 index was down 1.2 per cent at lunchtime, while Frankfurt’s Xetra Dax fell 1 per cent and the CAC 40 in Paris was 1.5 per cent lower.

Across the Atlantic, US government bonds sold off slightly as investors continued to focus on expectations for a strong economic recovery in the US and eventual policy tightening by the Federal Reserve.

The yield on the benchmark 10-year US Treasury note rose 0.02 percentage points to 1.62 per cent, its third straight daily increase.

This yield, which has climbed from around 0.9 per cent since the start of the year, influences borrowing costs worldwide and is highly sensitive to expectations about the central bank’s future interest rate decisions.

The 10-year yield dropped to around 1.53 per cent in a mini-rally on April 15, in a move one investor described as “bonkers” because it came even as strong economic data were released in the US. However, the trend higher in yields has now once again resumed.

“Treasuries suddenly looked like good relative value compared to high-yield bonds where valuations are very stretched,” said Olivier Marciot, multi-asset investment manager at Unigestion. “But over the medium term at least, US [government bond] rates have only one way to go and that is higher.”

Futures markets signalled the US S&P 500 index would lose 0.4 per cent when New York trading begins and the top 100 stocks on the technology-focused Nasdaq Composite would drop 0.2 per cent. Both major stock markets retreated from record highs on Monday.

The dollar index hovered around its lowest since early March while the euro strengthened 0.2 per cent to $1.205.

Brent crude, the international oil marker, added 1.2 per cent to $67.86 a barrel.

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