Summer mood swings: markets turn higher on hopes of virus aid

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LONDON/SYDNEY/HONG KONG (Aug 3): World stocks and the dollar rallied after a cautious European morning as thin summer trading led to sharp swings in the market, and worries about US gridlock over the next round of coronavirus aid eased.

In Europe, stocks were up 1.2% as technology stocks rallied on positive read-across from peers on the other side of the Atlantic, offsetting a selloff in big banks' shares after results.

Index heavyweight HSBC fell 5%, after it warned that its bad debt charges could surge to as much as US$13 billion.

US stock futures were up 0.5% with jittery investors cautiously adding positions, expecting progress on the stimulus package and on hopes of a Covid-19 treatment — as Eli Lilly started a late-stage study of a drug to see whether it can contain the virus in nursing homes.

"Three months to go until the US Presidential election! Surely Congress will want to get something over the line regarding new stimulus in the US driven more by politics than necessarily economics," said Chris Bailey, European strategist at Raymond James.

E-Mini futures for the S&P 500 were under pressure during Asia hours and came back strongly ahead of the US open.

"Thin markets can blow both ways quite easily," Bailey added.

On Friday, Fitch Ratings cut the outlook on the United States' triple-A credit rating to negative from stable and said the direction of fiscal policy depends in part on the November election and the resulting makeup of Congress, cautioning that policy gridlock could continue.

Those concerns have hardly hit the US technology sector, evident in Friday's record highs, with Apple overtaking Saudi Aramco to become the world's most valuable company.

Spanish stocks, meanwhile, were flat, underperforming rest of Europe as the country saw the biggest jump in coronavirus cases since a national lockdown was lifted in June, while data showed international tourist arrivals to the country fell 98% in June.

"Second wave virus concerns are building in Australia, Europe etc. but no huge risk-aversion move," said Bailey.

The euro and the pound were down with the dollar at US$1.1728 per euro and US$1.3020 per pound. Both currencies recorded their best monthly gain in nearly a decade in July.

Dollar bears also took some profits on crowded short positions, but further gains were likely to be capped by the slowing US economic recovery from Covid-19 and real rates breaking below -1% for the first time.

The real rate hit a record low amid a marked flattening of the yield curve, as investors wager on more accommodation from the Federal Reserve.

"Amid improvements in business sentiment, signals are emerging that the initial boost from pent-up demand is fading and consumer confidence is slipping lower," economists at Barclays wrote in a note.

"Together with concerns about labour market and virus developments, this clouds the outlook and could be exacerbated if US fiscal support is not renewed in time."

Benchmark 10-year Treasury yields were higher at 0.54%, after touching the lowest level since March last week. German government bond yields rose slightly to -0.527%.

Factory activity data from China showed the fastest pace of expansion in nearly a decade. That helped China's blue chips rally 1.6%, offsetting worries about US-China relations.

Japan's Nikkei meanwhile added 2.2%, courtesy of a pullback in the yen. The dollar steadied on the yen at 105.95, after hitting a 4-1/2-month low last week at 104.17.

The recent decline in the dollar combined with super-low real bond yields has been a boon for gold, which hit US$1,984 an ounce early on Monday and seemed on track to take out US$2,000 soon.

Oil prices eased on concerns about oversupply as OPEC and its allies are due to pull back from production cuts in August, while an increase in Covid-19 cases raised fears of slower pick-up in fuel demand.

Brent crude futures dipped 14 cents to US$43.38 a barrel, while US crude eased 17 cents to US$40.01.