European shares rise as investors bet on further US spending

European stocks opened at their highest level in almost three weeks as investors held on to hope of fresh economic stimulus in the US, while awaiting a key communication from the European Central Bank.

The region-wide Stoxx Europe 600 index was up 0.6 per cent by mid-morning, while Frankfurt’s Xetra Dax climbed as much as 0.9 per cent in early trading, before falling back to be 0.7 per cent higher.

This followed a strong close on Wall Street on Wednesday. The blue-chip S&P 500 stock index rose 1.7 per cent while the technology-focused Nasdaq ended the session 1.9 per cent higher.

America’s two major political parties remain billions of dollars apart on the size of a second major fiscal package to limit the economic damage wrought by coronavirus. But polling leads for Democratic candidate Joe Biden ahead of November’s presidential election have boosted hopes that another big fiscal stimulus will be agreed in the coming months.

Trevor Greetham, investment strategist at Royal London Asset Management, said markets were “starting to look through” the two-party debate over stimulus, given “Joe Biden’s widening lead in the polls”.

Markets are “increasingly seeing the prospect of Democrats taking control of both houses”, added Sean Markowicz, investment strategist at Schroders. “That will be good for stimulus.”

Futures markets signalled further gains when New York opens later. Contracts betting on the direction of the S&P 500 rose 0.5 per cent while those on the Nasdaq gained 0.6 per cent. Oil prices also climbed, with Brent crude up more than 1 per cent to above $42 a barrel.

The ECB is set to release minutes for its September meeting at 11.30 local time (12.30 in London), allowing investors to scrutinise them for clues about how policymakers plan to tackle deflation in the eurozone and the stubborn strength of the euro, which has gained more than 8 per cent against the dollar this year.

Investors have been snapping up Italian government bonds — a barometer of appetite for the debt of weaker eurozone nations — in anticipation of the ECB buying more of these securities to support peripheral economies through the pandemic. On Thursday the yield on Italian 10-year bonds, which moves inversely to price, hovered around a record low of 0.776 per cent.

The ECB boosted its bond-buying scheme, called the pandemic emergency purchase programme, to €1.35tn in June. Analysts at Goldman Sachs expect the PEPP to be enlarged by a further €400bn by the end of the year.

Across the Atlantic, US government bonds traded steadily on Thursday morning, with the yield on US 10-year Treasuries 0.02 percentage points lower at 0.77 per cent.

The 10-year Treasury yield is hovering at about a four-month high, while the yield curve has steepened sharply as investors weigh the prospects of more aggressive fiscal policy.

Companies listed on the S&P 500 are expected to report a 21 per cent year-on-year decline in earnings for the third quarter, according to Generali Investments. This would be their worst performance since the second quarter of 2009, at the height of the credit crisis, data compiled by FactSet show.

But the prospect of a corporate earnings recovery, “triggered by policy support”, would “remain the dominant theme for investors in the next months”, said Michele Morganti of Generali.


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