European shares hit fresh records at midday on Monday, despite worries over new Covid lockdowns in Austria.
The pan-European Stoxx 600 index was up 0.09%, and set a new record high of 487.48 points.
Miners were dragged lower on weaker iron ore and metal prices with Glencore, Rio Tinto and Anglo American all down as a result.
Investors will be eyeing retail sales figures in the US, China and UK this week as the third quarter earnings season begins to wind down.
“The market recovery has well and truly stalled in Europe while Asia is still struggling to get much uplift and the US is failing to build on record highs. In many ways, I’m encouraged by the resilience we’re seeing in the markets which are again factoring in higher inflation and earlier rate hikes. But then I wonder what will be the catalyst for the rally to continue,” said Oanda analyst Craig Erlam.
“There’s a long list of reasons to be concerned right now but with earnings season basically in the rearview mirror, the bullish list is looking a little light. Of course, Covid restrictions this winter could be relatively light touch as vaccinations keep hospitalisations and fatalities low which would be a big plus for companies and economies, and support equity markets. But that will only become clear over time.”
Elsewhere, Austria became the first European country to reinstate a fresh lockdown, placing millions of unvaccinated people under restrictions amid record-level infection rates.
In equity news, shares in Philips, which is recalling ventilators due to use of parts containing a potentially hazardous foam, plunged by more than 10.5% after the medical equipment maker announced it was in discussions with US regulators following a new inspection of one of its facilities.
Avast surged after NortonLifeLock satisfied the US antitrust condition for its £6.2bn acquisition of the London-listed cybersecurity firm.
Airbus climbed after it won a multi-billion-dollar order for 255 single-aisle A321neo passenger jets from private-equity firm Indigo Partners’ portfolio airlines and a separate order by Wizz Air for 102 of the aircraft.
Royal Dutch Shell gained after saying it would simplify its business and move its head office to the UK from the Netherlands.
Spanish Bank BBVA fell on its offer to buy the rest of Garanti BBVA for up to €2.25bn.
Investors are seemingly comfortable with modest rate hikes in order to deal with inflation risks but that may change if central banks roll the dice on inflation being transitory and are forced into more aggressive rate hikes next year. It’s a fine balancing act but as we saw recently, central bank inaction when inflation indicators are flashing makes investors very anxious.
Mixed data response from Asia
The week is off to a bumper start on the economic calendar in Asia, although it seems to have received a bit of flat reaction. Retail sales and industrial production in China both exceeded market expectations which should give investors some cause for optimism. On the flips side, fixed asset investment was only 6.1% dragged down by a decline in real estate investment as property sector woes continues to dampen sentiment.
The property sector, which accounts for around a quarter of Chinese GDP, is one major risk for the economy as new home prices continue to fall. But others continue to weigh including strict Covid lockdowns, supply disruptions, higher inflation, electricity outages etc.
In Japan, the recent restrictions weighed heavily on growth in the third quarter which undershot already gloomy forecasts. The country contracted by 3% on an annualised basis but should bounce back quickly as restrictions have been lifted and a large new fiscal package is due to be announced. There wasn’t much of a negative reaction in the markets, although investors have been quite forgiving of restriction-driven impacts, especially if more stimulus is on the cards.
Oil pullback losing momentum
Oil prices are falling again on Monday, although the pullback does appear to be losing momentum as it approaches the lows from a couple of weeks ago. The correction has been partially attributed to the prospect of US President Joe Biden releasing oil from the SPR. While I’m sure Biden will be happy with this result, I’m not convinced it’s a threat he wants to follow through on. Not at these levels. It’s win-win in that sense. For now, at least.
Ultimately prices remain well supported as there’s little chance of OPEC+ raising output faster, especially if – as UAE energy minister Suhail al-Mazrouei claimed today – the group expects the market to return to surplus in the first quarter of 2022. With US shale not the force it was prior to the pandemic as focus shifted to debt and shareholder repayments this year, we may have to get used to prices at these elevated levels.
