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Markets drift after Wall Street’s worst sell-off since October


European stock markets and US equity futures drifted on Tuesday following a sharp sell-off on Wall Street overnight and rising coronavirus cases and lockdowns in western nations.

After Wall Street suffered its worst trading day since October on Monday, the Europe-wide Stoxx 600 and Germany’s Xetra Dax both traded flat while London’s FTSE 100 gained 0.6 per cent. Futures markets signalled the S&P 500 and Nasdaq would gain around 0.2 per cent at New York’s opening bell.

Boris Johnson, UK prime minister, ordered a third, potentially economically disastrous national lockdown for England on Monday night, closing all primary and secondary schools until mid-February. Germany extended its lockdown by another three weeks, while the number of people in US hospitals with coronavirus hit a new peak, underpinned by record numbers of patients in the southern and western regions of the country.

Investors were also awaiting results from run-off elections in Georgia that would determine which party controlled the Senate, setting the tone for future fiscal stimulus spending.

“None of the factors pointing in either direction is particularly convincing, and the race looks close to a toss-up, albeit with a slight Republican lean,” analysts at Goldman Sachs said.

Line chart of Performance on January 4 at US eastern times (%) showing US stocks slip on first trading day of 2021

Goldman forecasts that a so-called blue sweep, with Democrats controlling both houses after Joe Biden’s presidential victory, would add $600bn of government stimulus to the $900bn agreed by lawmakers late last year.

Christopher Jeffery, head of rates and inflation strategy at Legal & General Investment Management, said such a result could further weaken the dollar but would boost global stock markets and emerging market currencies. “The Federal Reserve has also locked in an extremely loose [monetary] policy for a long time now,” he said, meaning economic growth spurred by government spending “would not be met with higher interest rates”.

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The dollar, measured against a basket of currencies, has dropped 7 per cent in the past year and weakened by a further 0.3 per cent on Tuesday to stay at around its lowest level since April 2018. The yield on the 10-year US Treasury bond, which moves inversely to its price, added 0.2 percentage points to 0.93 per cent.

Against this background of economic uncertainty in the west, fund managers focused on Asia’s bright spots. China’s CSI 300, which tracks the largest shares on the Shanghai and Shenzhen stock exchanges, added 1.9 per cent.

South Korea’s Kospi 200 closed 1.5 per cent higher, New Zealand’s NZX 50 ended the session with a 2.1 per cent gain and the Hang Seng index in Hong Kong added 0.6 per cent.

“Investors are going for growth,” said Savvas Savouri, chief economist and partner at London-based hedge fund Toscafund, noting that China’s economic recovery from Covid-19 was boosting not only the nation’s own stock market and currency but also those of economies that benefited from Chinese domestic spending.

China’s onshore-traded renminbi was 0.1 per cent stronger at Rmb6.4559 per dollar a day after it crossed the 6.5 per greenback threshold for the first time in more than two years.

China’s currency is tightly controlled by the nation’s central bank. The People’s Bank of China permitting it to rise, Mr Savouri said, was “a signal that they don’t trust their traditional export markets in the west to stay healthy, so let’s focus on domestic consumption”.

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