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European stocks fall after worst day for Wall Street since October

European equities fell in early trading on Thursday after Wall Street suffered its worst day since October, as negative signals from corporate earnings and fears over the impact of new coronavirus strains hit investor sentiment.

The continent-wide Stoxx 600 index fell 1.7 per cent in morning trading, putting it on track for its worst day of the year. Germany’s Xetra Dax dropped 1.8 per cent and London’s FTSE 100 benchmark fell 1.6 per cent.

The wave of company results on Wednesday provided the latest glimpse of how the coronavirus pandemic was hitting sectors such as aviation. Aerospace manufacturer Boeing reported a record net loss, and delayed the delivery of its wide-body 777X jet into commercial service. The blue-chip S&P 500 index, which has rallied powerfully since March when the pandemic first pummelled global markets, fell 2.6 per cent.

“I think it started with the Boeing results and then you had some results during the day which were also quite weak,” said Joost van Leenders, senior investment strategist at Kempen Capital Management.

“What you see now is a difference between companies that were hit by the pandemic, and those that benefited, but what I think is encouraging overall is that companies know that the vaccine is coming and they’re not hesitating in giving forecasts for 2021.”

Wall Street was poised to open lower on Thursday. Futures tracking the S&P 500 were down about 0.9 per cent, while those for the Nasdaq 100 were 1.3 per cent lower.

The yield on 10-year US Treasuries, which has been pushed down in recent days as investors buy up the haven asset, crept 0.01 percentage point lower to just above 1 per cent.

In Asian trading, Japan’s benchmark Topix lost 1.1 per cent, while in Australia the S&P/ASX 200 dropped 1.9 per cent. Hong Kong’s Hang Seng index, which hit multiyear highs earlier this week, weakened 2.6 per cent and the benchmark CSI 300 index of Shanghai- and Shenzhen-listed shares was down 2.7 per cent.

“Investors should monitor, but not fear, the risk of a correction,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management. 

He added that JPMorgan was “still constructive on the global economic fundamentals” over the next 12-18 months. That should support equities, emerging market debt and corporate credit, Mr Hui said, but he suggested investors “should take a more diversified approach”.

The equity sell-off came despite the Federal Reserve reassuring markets on Wednesday that it would keep its loose monetary policy in place as it held its main lending rate at close to zero. 

However, markets were shaken by concerns over new variants of coronavirus as well as the speed at which vaccines could be rolled out.

In China, where the recovery from coronavirus is more advanced than in other big economies, an adviser to the central bank this week warned that asset bubbles would persist unless monetary policy was adjusted. 

The People’s Bank of China withdrew Rmb150bn ($23.2bn) of liquidity on Thursday through its open market operations — a process through which the central bank and the banking system lend to one another — in the biggest such move since October.

Ken Cheung, chief Asia foreign exchange strategist at Mizuho Bank, suggested that “fears of deleveraging drove China and Hong Kong equities lower” on Thursday.

Markets also continued to digest the policies of US president Joe Biden, including delays to his proposed stimulus package.

The US Treasury also delayed the implementation of a ban on Americans investing in about 35 companies with suspected ties to the Chinese military, which Donald Trump imposed after he lost the presidential election last year.

The ban, which would also have forced the liquidation of all US holdings in these companies by November, was supposed to take effect on Thursday. The Biden administration on Wednesday extended the deadline to May 27.

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