LONDON (Reuters) – European equities recovered some of their early losses on Tuesday and futures pointed to a recovery on Wall Street, after a wave of risk aversion swept markets at the start of the week.
Wall Street had its biggest daily losses in a month on Monday and Asian markets also fell overnight, which analysts said was due to new lockdown measures in Europe and caution ahead of the U.S. elections.
The MSCI world equity index, which tracks shares in 49 countries, was broadly flat at 1134 GMT after dropping to a 19-day low in the previous session.
MSCI’s main European Index hit a one-month low on Tuesday before recovering to be down 0.2% on the day by 1136 GMT, while the STOXX 600 also touched a one-month low before easing to trade flat on the day.
Wall Street futures pointed to a bounceback in the United States, with corporate earnings in focus.
“Markets are stabilising somewhat today but we had a relatively big sell-off yesterday,” said Kiran Ganesh, a multi-asset strategist at UBS.
“We think a number of things are coming together than have been behind that: the new restrictions on movement on Europe has delayed some projections on when we get back to pre-pandemic norms,” Ganesh said.
“We’ve got the signs that the election race is perhaps narrowing. I think investors at the beginning of the month felt a bit more optimistic on the chances of a blue wave leading to more fiscal stimulus. If you look on some of the predictions markets that seems to be narrowing somewhat,” he added.
The United States has seen record COVID-19 infections, while in France authorities are looking at options for tighter lockdown measures as the virus has kept spreading despite some of the tightest restrictions in Europe.
In Italy, there were protests against lockdown restrictions on Monday. German leaders are due to meet on Wednesday to decide on additional restrictions.
Graphic: 2020 asset performance here
Graphic: World FX rates in 2020 here
Dan Scott, chief investment officer at Vontobel Asset Management, said he moved on Friday to an “underweight” position on European equities and “double overweight” on emerging market equities, in light of the resurgence of COVID-19 in Europe.
“We feel that Europe is not really through this as well as other areas,” Scott said.
“It’s important for us not to have too much of a Europe- focused view because there are other parts of the world coming out of COVID quite nicely,” he said, citing Singapore and Hong Kong planning a travel bubble, and Hong Kong unwinding its restrictions.
A lack of short-term progress towards a U.S. fiscal stimulus also dampened sentiment. White House economic adviser Larry Kudlow said talks had slowed but were continuing.
But some investors were still optimistic that fiscal stimulus was on the horizon.
“We’re going to get fiscal stimulus eventually. If the Republicans win we’ll get less of it, quicker, and if the Democrats win we’ll get more of it, but it will take a bit longer,” said Scott.
Currency markets did not show risk-aversion to the same extent as equities, with the dollar losing its early gains, down 0.2% against a basket of currencies at 1148 GMT.
The euro was up 0.1% against the dollar and euro-sterling slipped.
Brexit talks in London have been extended until Wednesday. Prime Minister Boris Johnson said Britain’s decision on whether to agree a Brexit deal with the European Union was “entirely separate” from the U.S. election result.
Euro zone government bond yields slipped by 1-2 basis points, with little appetite for major moves before Thursday’s European Central Bank meeting.
Oil prices rose towards $41 a barrel, after recent sharp losses. Brent crude gained 0.91% at $40.83 a barrel by 1152 GMT. U.S. oil gained 1.01% to $38.95 a barrel.
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