US equities had a cautious end to the week as fresh optimism about the outlook for the economy was tempered by concerns over the rising number of coronavirus cases.
Morning gains were erased after Apple said it will close again some US stores in states where local cases of the virus are increasing. The S&P closed down 0.6 per cent while the tech-heavy Nasdaq Composite finished flat.
The falls stalled growing momentum in equities markets this week following last week’s jitters. The MSCI World index of developed market equities rose 3.2 per cent this week as investors were fortified by the US Federal Reserve’s actions to support the economy.
Earlier optimism was reflected in Europe, where markets closed before the Apple news emerged. The composite Stoxx 600 index rose 0.6 per cent. London’s FTSE 100 was the standout riser, closing up 1.1 per cent after better than expected British retail sales numbers and news that the government had downgraded its coronavirus alert level.
However, many investors warn that equities have become overvalued compared with projected corporate earnings, and the economic recovery from the pandemic will become increasingly difficult in the months ahead.
“In the next few weeks, the easy part of a post-Covid-19 recovery will be over and by then credit and equity will be far more expensive,” said Sebastien Galy, strategist at Nordea Asset Management. “The question beyond this is whether authorities have managed to stabilise long-term growth expectations which drive many long-term and short-term behaviours.”
The gains came despite renewed fears about upticks in Covid-19 infections. The US on Thursday recorded its largest one-day increase in coronavirus cases since early May, raising uncertainty over the prospect of a swift economic recovery. The jump of 27,000 infections was fuelled by a record number of new cases in California, Florida, Arizona and South Carolina.
The Tips yield — often seen as a measure of the real government borrowing costs — for 5-year government debt hit a record low of minus 0.733 per cent, according to data from Tradeweb. A falling Tips yield is an indication investors are worried about the prospects for economic growth.
Chinese officials have also been grappling with a spate of new Covid-19 cases in Beijing. Authorities reported another 25 cases in the city by the end of Thursday, taking the tally for the latest outbreak to 183.
These developments were offset by a potential step towards easing geopolitical tensions between the US and China. Reports of meetings between officials from the two countries in Hawaii suggested their preliminary trade deal was intact.
“It shows both sides are willing to step back from the brink, which is positive for markets,” said Andy Maynard, a trader at China Renaissance. But he added there was “no new catalyst in the market” capable of pushing equity prices higher.
Investors have batted off fears that new outbreaks would set back economic recovery against a backdrop of liquidity pumped into financial markets by central banks, the potential easing of US-China tensions and the reopening of economies.
“It is more likely that despite occasional local outbreaks leading to pauses in reopening in some states and potentially to local shutdowns, the overall trend of easing restrictions will continue,” said analysts at Bank of America, who predict European stocks will rise 15 per cent by November.
The UK pound had its worst week in a month against the dollar, after falling below $1.24. Traders focused on the economic damage to the UK from a severe coronavirus outbreak and the prospect of less quantitative easing from the Bank of England going forward, according to analysts at MUFG.
Sluggish economic recovery is not the only factor threatening to derail the bull run, analysts said. An increase in bankruptcies, permanent unemployment and renewed geopolitical friction in Asia-Pacific could reverse the positive sentiment in markets.
Stocks in Asia struggled for direction on Friday. Tokyo’s benchmark Topix index was flat while Hong Kong’s Hang Seng rose 0.8 per cent. South Korea’s Kospi gained 0.4 per cent and mainland China’s CSI 300 index gained 1.3 per cent.
Oil prices were supported by a report citing two of the largest commodity traders saying that crude demand was recovering rapidly this month and pledges by two producers to compensate for overproduction in May to comply with quotas set by Opec and its allies.
Brent crude, the international benchmark, rose 1.3 per cent to $42.05 a barrel, while West Texas Intermediate, the US marker, climbed 1.9 per cent to $39.57 a barrel.