Stock markets tumbled on Tuesday as uncertainty over economic recovery prevailed over the optimism fuelling a recent US stock market rally.
The Nasdaq (^IXIC) had hit a new record high on Monday, with technology and communication stocks surging. The S&P 500 (^GSPC) also reached its highest point this year and Asian stocks rose overnight as a rally continued to gather pace from the lows of mid-March.
But the rally appeared to run out of steam on Tuesday, with investor attention focused on a two-day Federal Reserve meeting this week.
The pan-European Stoxx 600 (STOXX) was trading 1.3% lower in late afternoon trading in Zurich, with eurozone banks hurting most in a 5.6% slide after a six-day upward streak.
Randy Frederick, vice-president of trading and derivatives for US investment firm Charles Schwab, said the S&P 500’s rise had been so fast “you can always anticipate periodic short bouts of profit-taking to occur along the way.”
Fresh data also showed German exports plummeted much more than expected by economists in April, down 24% in their steepest decline in three decades. The FTSE took a hit as cigarette giant British American Tobacco slid after warning COVID-19 would hit sales, and banking stocks also dragged indexes lower.
Wilson noted investors in European markets, with fewer tech giants than US indices, seemed unsure whether to follow Monday’s US stock rally or “show some more restraint given the economic uncertainty.”
Banks, oil, carmakers, travel and leisure stocks suffered the greatest falls, with all particularly sensitive to the economic impact of COVID-19.
The recent rally particularly in the US has taken many by surprise, given the grave economic damage sparked by the pandemic, including more than 42 million unemployment insurance claims in the US. Many analysts warn of a growing gap between the market recovery and the real economy, downbeat over companies’ earnings prospects with economies still hobbled by COVID-19.
But the rally had gained fresh momentum after a surprise jump in US employment data on Friday, and signals on Monday the Federal Reserve’s loan schemes could be extended to more firms. Neil Wilson, chief market analyst for Markets.com, said it looked like a “mad fear-of-missing-out trade.”
Investors appeared to brush off Fed chair Jerome Powell’s warnings over a second wave of the virus and the US downturn being officially declared a recession.
Asian stocks had also largely risen overnight, with the MSCI index of Asia-Pacific shares outside Japan (AAXJ) rising for a ninth trading session in a row.
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George Ball, chief executive of SMH Group, struck a cautious tone, suggesting 2021 corporate earnings were likely to be “much lower” than consensus and markets’ next move likely to be downwards.
Wilson also said stocks looked “very richly priced” unless earnings bounced back significantly faster than consensus expectations. “It’s remarkable equity markets can be this stretched on such a catastrophic economic contraction — but that is what unlimited Fed liquidity does,” he noted.
But Brent Schutte, Northwestern Mutual chief investment strategist, told Yahoo Finance’s The Ticker investors were generally looking beyond much of the backward-looking economic data. “It’s looking forward to a better future, it’s reflecting the fact that we’re opening large swathes of the US economy without significant spikes in cases.”