Wall Street ends lower for fourth session out of five
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A sell-off in US stocks resumed on Thursday as Congress failed to make progress on a new stimulus package and signs emerged that improvements in the US labour market have stalled.
The S&P 500 index closed lower by 1.8 per cent, while the tech-heavy Nasdaq Composite dropped 2 per cent. US stocks had rebounded on Wednesday, snapping a three-day rout that had previously sent the Nasdaq into correction territory.
Shares in the electric car maker Tesla, the stock that has typified the ebullience of retail investors, erased nearly all of its previous gains for the day, having risen 6 per cent at one point.
The last chance of an immediate relief package to limit the economic damage from coronavirus was extinguished on Thursday, after Democrats voted to block legislation put forward by Senate Republicans. They argued that the package was too small and failed to provide adequate support to the hardest hit households.
Congress has already passed several stimulus programmes, but economists and investors have argued that a new agreement is necessary given that some benefits, including additional unemployment aid, have now lapsed.
Randy Frederick, vice-president of trading and derivatives at Charles Schwab, saw Thursday’s sell-off as the continuation of a healthy repricing for stocks, which surged in August to new highs.
“The market can go up in the long-term, but it doesn’t go up every day,” he said, adding the recent dip was correcting some “irrational exuberance”.
Lee Ferridge, head of macro strategy for North America at State Street Global Markets, warned that extreme price gyrations are likely to become more common given how far equities have recovered since the lows reached roughly six months ago.
“While I don’t see a major, major sell-off back to where we were in March and April, what you can expect is much more volatility,” he said.
In Europe the continent-wide Stoxx 600 equity index fell 0.6 per cent, having reversed its earlier gains.
The euro moved higher as investors interpreted comments from European Central Bank president Christine Lagarde as opening the door to further appreciation in the currency.
The ECB left its monetary policy unchanged, with interest rates held at minus 0.5 per cent. To the extent that the euro was putting “negative pressure” on inflation, the central bank had to “monitor carefully such a matter and this was indeed extensively discussed during our governing council”, Ms Lagarde said at a press conference after the meeting. But the ECB did not set a target for the exchange rate, she stressed.
“Perhaps the only surprise was the reluctance of president Lagarde to push back on the strength of the euro during the press conference,” said Dean Turner an economist at UBS Global Wealth Management.
The euro added to gains made earlier in the session to be up 0.6 per cent against the dollar at $1.1875 at one point. It has risen about 11 per cent against the greenback since its March low.
The common European currency also gained 1.8 per cent against sterling, as fears grew about a messy divorce between UK and the EU when the Brexit transition period expires at the end of the year. Brussels threatened legal action over Britain’s plans to breach the withdrawal agreement agreed between the two sides.
Economists are concerned that while the ECB would prefer a weaker euro, it has few tools in its arsenal to achieve this. “Markets know that there is very little that the ECB can actually do to weaken the currency,” said Seema Shah of Principal Global Investors.
“The euro is strengthening for all the right reasons: improving growth, relatively contained Covid infection rates, and positive developments in the fiscal stimulus region,” she added.
A stronger euro makes eurozone exports less competitive and drags down inflation by lowering import prices. The region slipped into deflation last month for the first time in four years, after consumer prices fell 0.2 per cent from a year earlier. The eurozone economy also contracted by a record 11.8 per cent in the three months to June, compared with the previous quarter.
Most economists expect the ECB to expand its €1.35tn emergency bond-buying programme as early as December if inflation shows little sign of bouncing back.
UBS’s Mr Turner said he expects the euro to continue its strong run and to trade as high as $1.25 by the first half of next year.
Yields on German 10-year bonds, which rise as prices fall, ticked 3 basis points higher on Thursday to minus 0.43 per cent. The yield on the benchmark 10-year Treasury note was lower, at 0.68 per cent.
Oil prices inched lower after a strong start to the day, following US crude inventory data that suggested weakening demand. Brent crude, the international benchmark, was down 0.9 per cent at roughly $40 a barrel.
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