Investors focus attention on US stimulus ahead of earnings season

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European stock markets made modest gains on Thursday as investors awaited details on a further US spending package and signs from the latest corporate earnings reports of a recovery from the Covid-19 crisis.

The Stoxx 600 index added 0.5 per cent in morning trading, with economically sensitive sectors including financials and consumer cyclicals leading, while the UK’s FTSE 100 rose 0.7 per cent.

President-elect Joe Biden is expected to soon unveil his plans for a stimulus package for the US economy, having said last week the government should spend “trillions of dollars” on cheques for individuals, unemployment benefits and investments in clean energy and infrastructure.

Nick Nelson, head of European equity strategy at investment bank UBS said the stimulus announcement would be “key” for market sentiment. “If we are going to get considerably more spending, that creates a stronger global growth backdrop.”

Investors also have an eye on corporate earnings as the Covid-19 crisis drags on. The US corporate earnings season kicks off on Friday with results from JPMorgan Chase, Citigroup and other large banks. The latest quarterly earnings results from FTSE 100 companies on Thursday included those from grocer Tesco, which reported growth in Christmas sales but also Covid-related costs.

Over the next week, investors’ attention may “swivel back” from the macroeconomic outlook and politics to how companies are faring, said Mr Nelson, with investors keen to find out management teams’ forecasts for a vaccine-led recovery. But “it remains difficult for businesses to look round corners”, he added.

Government bond markets, meanwhile, saw further weakness on Thursday. The yield on the US 10-year Treasury bond, which moves inversely to its price, added a further 0.02 percentage points to just under 1.11 per cent, having crossed 1 per cent last week for the first time since March.

Investors have responded to Mr Biden’s expected spending plans in recent days by selling off US Treasury bonds, because of concerns the spending will feed through to higher inflation, which erodes the value of Treasuries’ fixed-interest payments. The dollar, as measured against a basket of currencies, was fractionally lower.

A senior Federal Reserve official on Wednesday pushed back against fears the US central bank would respond to rising inflation by increasing interest rates. Richard Clarida, vice-chairman, in remarks reported by Reuters, told a conference held by the Hoover Institution that “we are not going to hike” until inflation reaches 2 per cent.

The US Department of Labor reported on Wednesday that consumer prices rose 1.4 per cent, year on year, in December. The increase was slightly ahead of the 1.3 per cent expected by economists polled by Reuters and Bloomberg.

Mr Clarida said rates would not be lifted until inflation runs at the Fed’s 2 per cent target for a year, adding: “We are trying to tie our hands.”

Futures markets signalled the S&P 500 share index would gain about 0.2 per cent when Wall Street opens for trading later in the day.

“From a global portfolio perspective the focus at the moment is Biden and the Fed,” said Louise Dudley, global portfolio manager at asset manager Federated Hermes.

The banks’ earnings over the coming days “will be interesting in terms of a bellwether health-check and to see how corporate lending is going”, she added.

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