European rally cools after bumper start to the week

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European stock rally cools
● Dollar index inches up as euro rally flags
● Government bond markets steadier after sell-off

The ‘Macron rally’ that marked the start of this week is steadying on Wednesday morning, as stocks across the continent slipped for the first time in several days. (More on that here.)

Nonetheless, futures indicate the S&P 500 index will open at 2,387.6 on Wednesday, easing just 1 point and leaving the US stock benchmark less than 9 points shy of its best ever close. The technology-rich Nasadaq Composite index finished on Tuesday in virgin territory and its strongly performing heavyweight members such as Apple, Amazon, Microsoft and Facebook make up 4.7 per cent of the All-World market cap.

Tech shares of such companies have done well of late on hopes they operate in structurally growing sectors that will help their earnings. In addition investors are more optimistic that corporate profitability more broadly will improve under the tax plans of the Trump administration.

Forex

The euro is also steadying after its rally that began with Monday’s 1.3 per cent leap in response to the French election. Ahead of Thursday’s European Central Bank meeting — after which monetary policy is expected to be unchanged — the common currency is up just 1 pip to $1.0927.

The euro’s recent renaissance leaves the dollar index, which tracks the buck against a basket of major peers, near its lowest level since the immediate aftermath of Donald Trump’s election victory in November.

The Japanese yen continues to soften against the dollar, weakening 0.3 per cent to ¥111.42 as the market’s waning nerves reduce demand for such perceived haven assets.

Fixed income
That trend has contributed to pressure sovereign bond prices of late, though action is more muted on Wednesday.

The 10-year German Bund yield, which moves in the opposite direction to the bond price, is up 1 basis point to 0.39 per cent. Bund yields were as low as 0.15 per cent last week as investors scrambled for safety ahead of the first round of the French election.

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