AFP, Reuters London
European stock markets edged up yesterday following a strong showing in Asia, ahead of a key speech from US Treasury secretary nominee Janet Yellen.
Tokyo’s Nikkei 225 closed 1.4% up at 28,633.46 points and Hong Kong’s Hang Seng ended 2.7% higher at 29,642.28 points, while Shanghai’s Composite lost 0.8% to close at 3,566.38 points.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.5% to a record high.
This week’s key event is Biden’s inauguration today, with the Democrat vowing swift action to fight pandemic fallout and boost the ailing US economy.
First, investors were to keep close tabs on Yellen, who was expected to tell lawmakers later yesterday that the world’s top economy could suffer if they do not approve Biden’s stimulus.
“The mood in Europe is a little optimistic as traders look ahead to Janet Yellen’s testimony,” said analyst David Madden at trading firm CMC Markets UK.
“Yellen is tipped to tell politicians the government needs to ‘act big’ as a way to support the economy.”
Global coronavirus cases broke 95mn this week while deaths have topped two million, putting pressure on governments to quickly distribute vaccines while at the same time imposing strict, economically painful lockdowns.
“It will be Yellen’s task today to explain why such aggressive spending is required to help the economic recovery along,” added Madden.
“The former head of the Fed will touch on the excessive debt levels that will be racked up because of the stimulus but at the same (time), borrowing costs are very cheap.”
Traders were looking ahead also to US corporate earnings, including from home entertainment giant Netflix, Bank of America and Goldman Sachs. “As has been the case for the last week or so, markets are lacking any real direction,” said Oanda analyst Craig Erlam.
“Perhaps we are just seeing a holding pattern ahead of the inauguration and in anticipation of a flurry of earnings reports.”
Wall Street looked set for a strong start, with S&P 500 futures rising 0.7% and Nasdaq futures up 0.8% after the long holiday weekend.
The MSCI world equity index, which tracks shares in 49 countries, was up 0.4% by 1231 GMT.
“Yellen will attempt to sell US President-elect (Joe) Biden’s $1.9tn fiscal stimulus plan (arguing that low interest rates allow a big fiscal stimulus),” Paul Donovan, chief economist of UBS Global Wealth Management, said in a note.
“If the growth rate generated by government investment in infrastructure or people exceeds the cost of borrowing, it is a worthwhile exercise.”
Yellen will tell the Senate Finance Committee that the government must “act big” with its next coronavirus relief package, according to her prepared statement seen by Reuters.
Data on Monday confirmed that the world’s second-largest economy was one of the few to grow over 2020 and actually gathered pace as the year drew to a close.
Analysts at JPMorgan felt the coming earnings season could brighten the mood, given the consensus in Europe was for a 25% fall year on year, setting a very low bar.
“The projected EPS (earnings per share) growth in Europe now stands at the lows of the crisis, which seems too conservative and could likely lead to positive surprises over the reporting season,” they wrote.
The same could be true for the United States.
Bank of America shares rose in pre-market trade after results while investors were awaiting for results from Goldman Sachs and Netflix.
Morgan Stanley, IBM and Intel are slated later this week.
Despite the risk-on mood on Tuesday, some dealers were wary before President-elect Biden’s inauguration on Wednesday, fearing more mob violence.
Wall Street is also bracing for tougher regulations now that the Democrats control the Senate, with Biden set to nominate two consumer champions to top financial agencies.
In foreign exchange markets, the US dollar slipped from close to its highest in nearly a month as caution set in before Yellen’s speech, where she is expected to reaffirm commitment to a market-determined exchange rate.
The dollar index fell 0.3% to 90.48 but remained comfortably above its recent trough of 89.206.
The euro rose 0.5% to $1.212 after touching a six-week low of $1.2052 in the previous session.
The dollar weakened by 0.3% against the safe-haven yen at 103.9.
In fixed-income markets, Italian 10-year bond yields fell to 0.584% before a confidence vote in the Senate that could force Prime Minister Giuseppe Conte to resign.
But expectations that snap elections are unlikely, coupled with European Central Bank stimulus to fight the adverse impact of the coronavirus crisis, limited any sell-off.
Gold rose 0.1% to $1,838.3 an ounce, recovering from a six-week low of $1,809.90 briefly hit on Monday.
Optimism that government stimulus will buoy global economic growth and oil demand lifted crude oil prices.
Brent crude futures rose 1.1% to $55.36 a barrel and US crude was up 0.3% at $52.5.
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