European equities dipped on Wednesday as investors turned cautious ahead of US jobs data that could pressure the Federal Reserve to dial back its pandemic-era monetary stimulus.
The Stoxx Europe 600 was down 0.4 per cent, although it remained on course for a gain of about 1.5 per cent in June. Futures markets signalled Wall Street’s S&P 500 and technology-focused Nasdaq Composite indices would flatline at the New York opening bell.
The European equity gauge has not had a down month since January and has traded around record highs throughout June, along with Wall Street stock markets. But analysts said the next moves by the Fed could be more significant than upcoming quarterly earnings reports.
Analysts have upgraded their 2021 earnings per share forecasts for global companies by 15 per cent since January, according to research by Citi. Those following US and European businesses whose fortunes are linked to economic cycles, such as industrial groups and materials producers, have increased their earnings forecasts the most, Citi found.
But prices of companies’ equity and debt instruments had already been lifted so high by this optimism that “everywhere you look there is nothing left in terms of value”, said Tatjana Greil Castro, co-head of public markets at Muzinich & Co.
“So now everything is about the Fed and how much liquidity they will continue to pump into markets,” she added.
The Fed has purchased $120bn of bonds a month since last March under a monetary stimulus programme that raised government debt prices and reduced their interest yields. This has made equities relatively more attractive and lowered real interest rates, allowing companies to borrow money more cheaply.
Friday’s non-farm payroll report is expected to show the nation’s employers added close to 700,000 jobs in June, from 559,000 the previous month.
The US central bank broadly pledged to keep monetary policy accommodative until the labour market healed from last year’s economic shocks, although some of its policymakers have since signalled they believe this is getting close.
On Tuesday, Fed governor Christopher Waller told Bloomberg TV that “we are now in a different phase of economic policy, and so it’s appropriate to start thinking about pulling back on some of the stimulus”.
Caution also crept into markets on Wednesday about the intensifying spread of the Delta variant of Covid-19 in Europe. Spain’s Ibex 35 index fell 0.8 per cent as investors limited their exposure to companies in the tourism-dependent nation, while Italy’s FTSE MIB lost 0.7 per cent.
The dollar index, which measures the greenback against major currencies, held at around its highest since early April. The euro, which has lost more than 2 per cent against the dollar this month, slid 0.1 per cent to $1.188.
Prices of other haven assets also firmed. The yield on the benchmark 10-year US Treasury bond dropped 0.02 percentage points to 1.459 per cent. Germany’s equivalent Bund yield fell by 0.02 percentage points to minus 0.190 per cent.
European equity strategists at Barclays wrote in a research note that while the Delta variant was “a concern”, the “key tail risk” for stock market investors was bond yields rising if strong employment data raised expectations of Fed rate increases.
“The risk is . . . investors fear the Fed is behind the curve and start pricing in tighter policy ahead,” they wrote.
Brent crude, the international oil benchmark, rose 0.9 per cent to $75.40 a barrel.