World equity markets staged a broad retreat from recent highs on Thursday as profit taking was sparked by mildly disappointing corporate news and rallying oil prices.
Decisions by the European Central Bank to leave interest rates unchanged and by the Bank of England to cut rates by a quarter point were widely expected and had little impact on the markets.
Mike Lenhoff, chief strategist at Brewin Dolphin, said the recent rally in equities to post-bear market highs had been fuelled by earnings momentum.
“Earnings growth was bound to slow after the rapid recovery from one of the worst corporate recessions on record, yet in moderating this year, the earnings growth is still in double digits,” he said. “More importantly, reported earnings continue to surprise on the upside, which is what really matters for equity markets.”
By the close in New York, the Dow Jones Industrial Average was down 0.8 per cent, the S&P 500 was 0.7 per cent weaker and the Nasdaq Composite was off 1.2 per cent.
The declines followed disappointing monthly sales reports from several leading retailers.
European stocks suffered their worst losses since the bomb attacks in London on July 7. The FTSE Eurofirst 300 index dropped 0.7 per cent to 1,178.21.
Royal Bank of Scotland led the retreat after its second-quarter earnings fell short of expectations.
In Asia, Tokyo’s Nikkei 225 Average fell 0.8 per cent from Wednesday’s 15-month high amid growing uncertainty about a forthcoming parliamentary vote on postal privatisation.
The dollar continued to weaken against both the euro and sterling in spite of the day’s interest rate news.
The Bank of England’s rate cut, the first in two years, caused barely a ripple in the markets. The question now is whether there are more reductions to come.
“Our view at present is that [yesterday’s] move is likely to be followed up with further policy easing later in the year,” said James Knightley, economist at ING Financial Markets. “Consumer spending is weakening in line with the softening in house prices and gradual rises in unemployment.”
The European Central Bank, meanwhile, left rates unchanged – a decision that came as no surprise following a spate of positive business surveys in the region.
More good news came on Thursday from data showing strong German industrial orders figures for June.
Stephen Lewis, chief economist at Monument Securities in London, believes the currency markets are taking a brighter view of the eurozone’s economic prospects.
“Fears of recession in the eurozone have faded, with the release of data suggesting a quickening of business activity aided by a more competitive exchange rate,” he said.
But he cautioned that if the euro advanced too far in response to more expansive business trends, it could undermine the reason for the recovery.
“With few signs of a pick-up in domestic demand, the eurozone’s hopes for growth depend on exports resuming a buoyant trend. Consequently, any rally in the euro against the US dollar is likely to be self-limiting.”
Meanwhile, crude oil prices climbed back to within striking distance of the record highs hit earlier this week as gasoline futures rallied on supply concerns.
The benchmark crude future on Nymex was up more than $1 barrel by midday in New York from Wednesday’s close. It eventually settled up 52 cents on the day.
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