Equity markets lost ground on Friday as investors digested the early detail of Joe Biden’s economic rescue plan, in which the US president-elect pledged an additional $1.9tn in fiscal stimulus.
The package, which includes further direct payments to Americans and money for local governments, is intended to help resuscitate a struggling US recovery from the pandemic. It follows $900bn of aid agreed by lawmakers last month.
In Europe, the continent-wide Stoxx 600 dropped 0.8 per cent by early afternoon, while Frankfurt’s Xetra Dax fell 1 per cent and London’s FTSE 100 fell 0.9 per cent.
“The news is out, but I don’t think it’s a big surprise — now attention will shift to the upcoming negotiations between the Republicans and the Democrats,” said Luca Paolini, chief strategist at Pictet Asset Management.
In his speech on Thursday, president-elect Joe Biden outlined his incoming administration’s response to the coronavirus pandemic and called on wealthy individuals and corporations to pay their “fair share”.
The second stage of Mr Biden’s economic plan, set to be announced next month, is expected to include longer-term spending plans in areas such as infrastructure — with funding coming from taxes on companies and wealthy individuals.
“The bit that’s really taken the market by surprise is the taxation that was mentioned,” said Justin Onuekwusi, fund manager at Legal & General Investment Management. “The market always believed that a tax rise would come, but we didn’t expect to hear about it so early.”
Performance was down across most sectors in Europe, with the exception of healthcare stocks, as extended Covid-19 lockdowns continued to weigh on sentiment. And futures markets indicated that Wall Street would open lower, with the blue-chip S&P 500 set to fall 0.4 per cent.
Since the Democrats took control of the Senate in run-off races last week, giving them much greater power to shepherd their spending plans into law, investors have responded by selling off US government debt, pushing the 10-year Treasury yield above 1 per cent. The move signals a growing expectation that increased spending will feed through to higher inflation, eroding the value of Treasuries’ fixed-interest payments.
But this “reflation trade” was not in evidence on Friday, with the yield on the 10-year note slipping 0.02 percentage points to 1.11 per cent as investors bought the debt.
“In the context of the last 12 months, US Treasury yields have already moved a long way in a short period this year,” said Hugh Gimber, global market strategist at JPMorgan Asset Management. “The immediate reaction to the stimulus package may have been muted, but we would expect Treasury yields to push higher and the curve to steepen further over the coming months.”
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Investors were also keeping a close eye on earning results that kicked off on Friday with US lenders. JPMorgan Chase reported a 42 per cent bump in its net income as the improved economic picture allowed America’s biggest bank to reverse earlier loan charges.
In Asia trading, Hong Kong’s Hang Seng rose 0.3 per cent, while China’s CSI 300 index fell 0.2 per cent, as a muted reaction to Mr Biden’s stimulus package was compounded by news that the outgoing administration of President Donald Trump had added nine more Chinese companies to a blacklist for alleged military links, including smartphone maker Xiaomi.