European stocks slipped yesterday as investors dumped this year’s outperformers including technology and healthcare stocks and bid up banking shares after the US Federal Reserve unveiled its new policy framework.
The pan-European STOXX 600 index slipped 0.5%, but still ended the week about 1% higher after signs of progress in Covid-19 treatments and vaccines spurred optimism earlier in the week.
Technology stocks, which have surged about 11% this year, were down 0.8%, and the healthcare index fell 1.1%. Fed chairman Jerome Powell announced a new policy framework on Thursday, which focuses more on boosting US economic growth and less on worries that inflation could be running too high.
“If the Fed’s policies succeed in reflating the economy, interest rates are unlikely to fall much further and value stocks such as financials should begin to outperform growth stocks” analysts at BCA Research said.
Interest rate-sensitive banks, which have so far lagged the broader markets, jumped nearly 1.7% and were among the best sectoral performers this week.
Shares in BNP Paribas, HSBC and Banco Santander rose between 0.6% and 3.6%, providing the biggest boost to the STOXX 600.
Still, with coronavirus cases picking up again in Europe, investors fear that could impede an economic rebound from a crash in the second-quarter, though optimism around the development of a Covid-19 treatment has helped calm some jitters.
“We think an interrupted V-shaped recovery seems to be the way we’re heading,” said Francis Ellison, client portfolio manager of European equities at Columbia Threadneedle Investments.
“That means that we’re seeing a sharp recovery, but nowhere back to 2019 levels, and that will take a year or two to reach.”
Data yesterday showed German consumer morale worsened heading into September, casting some doubt on whether household spending in Europe’s largest economy is powerful enough to spur a recovery.
Norwegian Air tumbled 9.5% after the budget carrier said it still needed more cash to weather the Covid-19 pandemic as it reported a deep loss for the first half of 2020.
Italian state-owned bank Monte Dei Paschi di Siena gained 2.7% as it received a conditional green light from the European Central Bank for its bad loan clean-up plan.
Shares in German drugs company Bayer AG fell 2.7%. It said there were “bumps” in sealing its $11bn settlement of US lawsuits over its Roundup weed killer after a US judge cast doubt on the progress of the agreement.
Global stock markets paused for breath as traders eyed the outlook for both US interest rates and the global coronavirus crisis, while the yen briefly spiked after Japan’s prime minister said he was stepping down for health reasons.
The dollar weakened, meanwhile, as the pound notably climbed to its highest level since December 2019.
Although “the promise of lower rates for longer was music to the ears of Wall Street bulls” Craig Erlam, senior market analyst with OANDA Europe, said that “for now, little has changed.
The taps will be on for the foreseeable future as the economy recovers from the wreckage of the pandemic, hopefully aided by a vaccine later this year”. News of further coronavirus infection spikes around the world, particularly in Europe, continues to rattle investors after Germany and Spain imposed fresh control measures as cases surge following the easing of lockdowns.
“It looks like the Fed news wasn’t...appetising for European investors, who (are) showing signs of distress regarding rising Covid-19 cases...and the possibility of seeing stricter government measures again,” Swissquote Bank senior analyst Ipek Ozkardeskaya told AFP.
Powell said Thursday the Fed would be in no rush to reel in inflation even if it overshoots the central bank’s 2% target, instead opting for an average that takes into account periods of weak price rises.
The Fed chief added that policymakers would stick with the new framework “for some time”, indicating that the era of cheap borrowing is here for the foreseeable future.
Mulling the dipping dollar, ThinkMarkets analyst Fawad Razaqzada warned that a concern “which could come back to haunt the dollar shorts, is this: If the Fed allows inflation to overcook by not reacting fast enough, then it may have to tighten its belt more aggressively when it finally does start its hiking cycle in an effort to bring prices back under control”.
In London, the FTSE 100 closed down 0.6% to 5,963.57 points; Frankfurt — DAX 30 ended down 0.5% to 13,033.20 points; Paris — CAC 40 closed down 0.3 % to 5,002.94 points and EURO STOXX 50 ended down 0.1% to 3,321.32 points yesterday.