European stocks advanced on Thursday, as state aid and promising vaccine developments outweighed an escalation in the US-China row. The continent-wide Stoxx 600 rose 0.4 per cent, clawing back some of its losses from a day earlier.
Frankfurt’s Xetra Dax added 0.5 per cent, while London’s FTSE 100 rose 0.6 per cent. The breakthrough on EU plans to borrow €750bn to drive the region’s economic recovery and positive results from clinical trials for potential coronavirus vaccines at the start of the week gave investors reason to cheer. “We think Europe can outperform in the near term, with the catalyst provided by agreement on the EU recovery fund and better economic growth,” said Sharon Bell, European strategist for Goldman Sachs. Several governments have signed agreements, including the US as the worst-hit nation from Covid-19 forking out $2bn, with some of the 24 groups testing a coronavirus vaccine.
Among the groups is one being developed by Oxford university and AstraZeneca and another by Germany’s BioNTech and US pharma group Pfizer. However, a diplomatic row between the two global superpowers and the spread of Covid-19 in many parts of the world damped enthusiasm for equities. The dollar extended its decline, putting it on track to record its lowest level since September 2018. The US currency slipped 0.2 per cent against a basket of peers, taking losses over the past 50 days to 5.4 per cent. The fall in the dollar follows a slide in real yields, which adjust the nominal yield on bonds based on expected consumer price changes, on US Treasuries to their lowest level since 2012. The real 10-year US Treasury yield fell to minus 0.91 per cent on expectations of more action by the Federal Reserve to prop up the economy.
The dollar’s decline has been accelerated by traders buying the euro ahead of and following the EU’s agreement on the pandemic recovery fund. The single currency strengthened 0.2 per cent on Thursday to trade at $1.1589. Analysts at MUFG said that the dollar, a haven currency, could strengthen if concerns about the spread of coronavirus in the second half of the year return to the fore for traders. “The main risk to the US dollar’s current bearish trend is if market confidence in the global recovery takes a significant hit,” they said. Gold added 0.5 per cent at $1,881 a troy ounce, extending its ascent as investors search for stores of value as returns on bonds turn negative, the dollar weakens and equities appear expensive. Futures trading tipped the S&P 500 to gain 0.4 per cent when Wall Street opens later, after staging a late rally on Wednesday following better than expected corporate earnings.
Chinese stocks and the renminbi stabilised after being shaken by Washington ordering the closure of the country’s consulate in Houston over spying concerns on Wednesday. Beijing has warned that it will retaliate unless Washington reconsiders the diplomatic post’s closure, which it said “seriously violates” the norms of international relations. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks closed flat after falling as much 2.1 per cent on Thursday. China’s onshore renminbi was down 0.1 per cent at Rmb6.9935 against the dollar after the country’s central bank on Thursday set the band in which the currency is permitted to trade at a weaker level. The exchange rate fell past the important 7-per-dollar threshold a day earlier. The consulate row has spooked Chinese traders who enjoyed a world-beating rally in the local market this year. “The situation will get even worse and I expect further action taken from both sides,” said Dickie Wong, head of research at Hong Kong-based Kingston Securities.
Elsewhere in Asia-Pacific, South Korea’s Kospi index dropped 0.6 per cent after official data showed that the Asian country fell into recession for the first time in nearly two decades. Oil prices rose, with Brent crude, the international benchmark, gaining 1 per cent to push towards $45 per barrel.