European stocks rally pauses ahead of US earnings season

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

The European Stoxx 600 slipped 0.3 per cent in late-morning trading, the UK’s FTSE 100 fell 0.4 per cent and futures markets indicated a soft opening for Wall Street bourses. The S&P 500 is set to open 0.2 per cent down and the technology-focused Nasdaq Composite 0.1 per cent lower.

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 accelerates.

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.

Investors, however, remain wary. Companies’ outlook statements will be under scrutiny for clues about whether coronavirus social curbs, a computer chip shortage and other supply chain logjams will hinder future earnings growth. The corporate tax rises that president Joe Biden is lobbying for may also add pressure to record high valuations, analysts said.

“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 Mike 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.

“Valuations are definitely a bit of a headwind,” added Supriya Menon, senior multi-asset strategist at Pictet. “The market for the rest of the year will definitely be driven by earnings growth rather than a rise in multiples sustained by liquidity,” she added. “And focus is turning to anticipated tax hikes and what they will mean for earnings for 2022 onwards.”

In fixed income, the 10-year Treasury note dipped 0.01 percentage points to 1.6533 per cent 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 poise for a jolt of inflation from President Joe Biden’s stimulus schemes. However, 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 closed 0.9 per cent lower 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 major currencies, was flat. Brent crude, the international oil benchmark, rose 0.5 per cent to $63.28 a barrel.

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