Markets steady while US Federal Reserve spat simmers


Equity markets held steady on Friday, reflecting the conflict between the drag of a worsening pandemic and the support of vaccine news, while some warned that tension between the US Federal Reserve and the Treasury could unsettle investors.

The Stoxx 600 and FTSE 100 are both on track for their strongest ever monthly rallies, up 14 per cent so far, and made modest gains on Friday. Europe’s benchmark Stoxx 600 index rose 0.7 per cent and London’s FTSE 100 gained 0.8 per cent by mid-morning trading.

But US futures contracts indicated that the benchmark S&P 500 would dip about 0.2 per cent when Wall Street opens later.

Despite the rising number of global coronavirus infections, risky assets have gained this month after Covid-19 vaccine developments from pharmaceutical groups Moderna, Pfizer and AstraZeneca. Optimism that breakthroughs might permit a return to normality has boosted stocks, particularly in unloved sectors such as travel and more economically sensitive industries, and sent the price of gold, a haven asset, sharply lower.

However, overnight news from the US Treasury could prove troubling. Despite the slowing economic recovery, the Treasury decided not to extend several emergency lending facilities set up by the Fed, which prompted the central bank to warn that the economy remained “strained and vulnerable”.

This is a “rare and poorly-timed public quarrel”, said Oxford Economics in a note.

“The emergency lending facilities have been little-used, but their existence has been key in ensuring a credible safeguard against financial market stress. With the Covid-19 crisis worsening and activity slowing in the absence of fiscal aid, the decision to curtail the Fed’s firepower could unsettle markets and exacerbate economic stress,” it added.

Trading Asia was also mixed. Japan’s Topix was flat, while China’s CSI 300 rose 0.3 per cent and Australia’s S&P/ASX 200 slipped 0.1 per cent.

Meanwhile, the yield on 10-year Treasuries dropped slightly to 0.84 per cent as investors bought the debt.

“Money and credit market developments have been very benign recently but the fear is that the safety provided by the measures is withdrawn at the time the economy is entering another tough patch,” said Antoine Bouvet, senior rates strategist at ING.

But Mike Bell, global market strategist at JPMorgan Asset Management, said the Treasury announcement was less significant than the continued absence of a fiscal support package, which he said was “becoming increasingly urgent.”

“The market is working on the assumption that we’ll get a deal in January,” he said. “If it wasn’t for the vaccine news I think the market would be a lot more focused on the stimulus deal, and the timing of it, and rising hospitalisations.”

“A rare public discord between the two sides” was weighing on futures, said Jim Reid, a strategist at Deutsche Bank.

US equities have trailed European stocks this month, as vaccine hopes have encouraged investors to bet on a revival in so-called “value” stocks — unloved shares which are typically found in sectors tied more closely to the path of the economy — over growth stocks such as tech. European indices have greater exposure to value. Still, the S&P and Nasdaq Composite both look set to rise by about 9 per cent in November.

The US has had a tough week of pandemic news, after coronavirus deaths rose by the most in more than six months, New York City announced it was closing schools again and the public health agency cautioned people against travelling for next week’s Thanksgiving holiday.

Data released on Thursday also indicated that new US jobless claims rose last week for the first time in five weeks, as restrictions were reimposed in some areas.

Armin Peter, head of debt capital markets at UBS, said markets were “currently defined by three interlocking themes”: lockdowns, vaccines and policy support. But the rise in global stocks has been more muted this week than last, since “asset classes are focused on the reflationary possibilities of a vaccine rollout,” he added.




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