Monday 21:10 BST. US and European equities started the week on a positive note, supported by retreating government bond yields on both sides of the Atlantic and optimism about the forthcoming quarterly earnings season.
The 10-year US Treasury yield had shot up to a two-year high on Friday as a robust US employment report added weight to the view that the Federal Reserve would soon start to scale back, or taper, its quantitative easing programme.
However, analysts also noted that while the number of jobs created last month had exceeded expectations, the unemployment rate had held steady at 7.6 per cent, rather than falling towards levels at which the Fed might consider abandoning its ultra-accommodative stance on interest rates.
As such there is likely to be plenty of interest in a speech from Ben Bernanke on Wednesday.
“It is possible that the Fed chairman will want to re-emphasise the difference between tightening and tapering when he speaks this week,” said Jane Foley, senior currency strategist at Rabobank
Divyang Shah, global strategist at IFR Markets, noted that other central banks had been keen to highlight how the markets had misinterpreted the Fed’s intentions.
“This led the Bank of England and European Central Bank to [last week] deliver radical shifts in communication in the hope that their own forward guidance would help to divorce what was happening with Fed expectations from impacting BoE and ECB rate expectations,” he said.
On Monday, the yield on the 10-year US government bond fell 9 basis points to 2.64 per cent – after touching 2.75 per cent in Asian trade – while that on the German Bund shed 3bp to 1.70 per cent. Portugal’s 10-year yield fell back below 7 per cent as political calm appeared to have been restored in the country over the weekend.
The dip in Treasury yields took some of the wind out of the dollar’s sails, with the US currency easing back 0.3 per cent against a basket of its counterparts, having earlier touched a three-year high.
But US equities maintained their positive tone, with the S&P 500 rising 0.5 per cent as the focus began to shift to the US earnings season, with Alcoa’s results due after the close of trade. The FTSE Eurofirst 300 advanced 1.4 per cent.
“US earnings are likely to once again beat expectations, despite disappointing sales in the first quarter,” said Alan Higgins, UK chief investment officer at Coutts.
“Consensus forecasts have presumably been affected by tapering fears, and are now overly bearish. Results for this and the following quarters’ earnings will give a crucial indication of how companies are coping with the prospect of a curtailing of US quantitative easing.”
The Nikkei 225 in Tokyo shed 1.4 per cent as Asian markets had a weak session. The Shanghai Composite index fell 2.4 per cent, while Hong Kong stocks lost 1.3 per cent.
The region was a major beneficiary of the Fed’s QE as low US yields drove investors to look for better returns overseas. But the prospect of the Fed “taking away the punchbowl” has reversed this trend.
“Investors in emerging markets ... worry that higher dollar rates could reverse the flow of capital and cause steep losses,” said Frederic Neumann, economist at HSBC.
Industrial commodities had a mixed session in spite of the dollar’s weakness.
Copper edged up 0.6 per cent in London to $6,830 a tonne, although Brent oil settled 29 cents lower at $107.43 a barrel after earlier touching a fresh three-month peak above $108 amid uncertainty about the situation in Egypt.
Gold rallied after two days of sharp losses, with the metal rising $12 to $1,235 an ounce.