European stocks drop before expected ECB decision to dial back stimulus

Equities updates

European equities dropped for the second consecutive session as expectations rose for central banks to wind back their crisis-fighting monetary stimulus programmes.

The regional Stoxx Europe 600 share index fell 0.6 per cent, having lost 0.5 per cent in the previous session. The UK’s FTSE 100 dropped by 0.5 per cent.

At its meeting on Thursday, analysts expect the European Central Bank to announce a slowdown of its bond purchases because of the brightening economic outlook.

The ECB’s €1.85tn pandemic emergency purchase programme, its main crisis-fighting policy, has bought €80bn of bonds a month for much of this year to keep lending costs down in the euro area. The purchases are widely expected to be reduced to about €60bn.

After the Stoxx and Wall Street’s S&P 500 hit record highs in recent weeks, fund managers said it made sense for them to turn lower at this point.

“Investors are back from the summer and thinking about the end of the Goldilocks environment, where you had economic recovery and very loose monetary policy,” said Nadège Dufossé, head of cross-asset strategy at European fund manager Candriam.

“The ECB looks set to be the first major central bank to communicate tapering [asset purchases],” she added, with investors worldwide poised “to see how they do it and how hawkish they appear”.

In the US, the Federal Reserve is also expected to announce reductions in its $120bn of monthly bond purchases, which have depressed yields on debt securities and boosted the relative appeal of equities, later this year.

St Louis Fed president James Bullard, told the Financial Times “the big picture is that the taper will get going this year and will end sometime by the first half of next year”.

Marija Veitmane, senior strategist at State Street Global Markets, said she did not expect a prolonged equity market correction because central banks would probably maintain interest rates at historic lows to the end of next year.

“This is a time where you could take a small step down in terms of risk appetite, but it is not the time to turn risk averse,” she said. “There is a strong distinction between tapering and rate hikes.”

The yield on Germany’s 10-year Bund, which moves inversely to its price, drifted 0.01 percentage points lower to minus 0.33 per cent. However, it remained near the highest level in two months. The 10-year US Treasury yield fell by the same amount to 1.35 per cent after hitting its highest point since mid-July on Tuesday.

Futures markets signalled Wall Street’s S&P 500 index would open flat, after closing 0.3 per cent down on Tuesday. Contracts on the technology-focused Nasdaq were also steady.

In Asia, Japan’s Nikkei 225 climbed for the eighth consecutive session, rising 0.9 per cent, as investors banked on the successor to departing prime minister Yoshihide Suga unleashing economic stimulus measures to combat the damage wrought by coronavirus.

Across the rest of the region, stock markets softened. Mainland China’s CSI 300 index fell 0.4 per cent and South Korea’s Kospi declined 0.8 per cent.

The dollar index, which measures the US currency against six others, rose 0.2 per cent. The euro lost 0.2 per cent against the dollar, purchasing $1.1842. Brent crude rose 1.1 per cent to $72.5 a barrel.

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