LDN - Business

Investors cautious as U.S. lawmakers wrangle over virus aid

[August 03, 2020] By Thyagaraju Adinarayan

LONDON (Reuters) - World stocks began August cautiously as U.S. lawmakers struggled to agree on the next round of coronavirus aid, though a squeeze on crowded short positions left the dollar clinging to a tentative bounce.

In Europe, stocks <.STOXX> were up 0.7% as technology stocks rallied on positive read-across from peers on the other side of the Atlantic, but gains were limited by a selloff in big banks' shares.

Index heavyweight HSBC <HSBA.L> fell 5% after it warned that its bad debt charges could surge to as much as $13 billion, and France's Societe Generale <SOGN.PA> reported a 1.26 billion euro ($1.48 billion) second-quarter loss.

U.S. stock futures <ESc1> were pointing to a muted open with jittery investors sitting on the sidelines amid the lack of a progress on the stimulus package and White House Chief of Staff Mark Meadows not optimistic about a deal.

"Three months to go until the U.S. Presidential election! Surely Congress will want to get something over the line regarding new stimulus in the U.S. driven more by politics than necessarily economics," said Chris Bailey, European strategist at Raymond James.

On Friday, Fitch Ratings cut the outlook on the United States' triple-A credit rating to negative from stable and said the direction of fiscal policy depends in part on the November election and the resulting makeup of Congress, cautioning that policy gridlock could continue.

Those concerns have hardly hit the U.S. technology sector, evident in Friday's record highs, with Apple <AAPL.O> overtaking Saudi Aramco <2222.SE> to become the world's most valuable company.

Graphic: Apple beats Saudi Aramco - https://fingfx.thomsonreuters.com/
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Spanish stocks, meanwhile, declined on Monday as the country saw the biggest jump in coronavirus cases since a national lockdown was lifted in June, while data showed international tourist arrivals to the country fell 98% year on year in June.

"Second wave virus concerns are building in Australia, Europe etc. but no huge risk-aversion move," said Bailey.

The euro and the pound were down only slightly with the dollar at $1.1755 per euro <EUR=> and $1.3065 per pound. Both the currencies recorded their best monthly gain in nearly a decade in July.

Dollar bears also took some profits on crowded short positions, but any further gains were capped by the slowing U.S. economic recovery from COVID-19 and real rates breaking below -1% for the first time.

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An employee counts U.S. dollar banknotes at a currency exchange office in Jakarta, Indonesia October 23, 2018. Picture taken October 23, 2018. REUTERS/Beawiharta

The real rate hit a record low amid a marked flattening of the yield curve as investors wager on more accommodation from the Federal Reserve.

"Amid improvements in business sentiment, signals are emerging that the initial boost from pent-up demand is fading and consumer confidence is slipping lower," economists at Barclays wrote in a note.

"Together with concerns about labour market and virus developments, this clouds the outlook and could be exacerbated if U.S. fiscal support is not renewed in time."

Benchmark 10-year Treasury yields <US10YT=TWEB> were higher at 0.54% after touching the lowest level since March last week. German government bond yields rose slightly to -0.527%.

Factory activity data from China showed the fastest pace of expansion in nearly a decade. That helped China's blue chips <.CSI300> rally 1.6%, offsetting worries about U.S.-China relations.

Japan's Nikkei <.N225> meanwhile added 2.2%, courtesy of a pullback in the yen. The dollar steadied on the yen at 105.95 <JPY=> after hitting a 4-1/2-month low last week at 104.17.

The recent decline in the dollar combined with super-low real bond yields has been a boon for gold, which hit $1,984 an ounce <XAU=> early on Monday and seemed on track to take out $2,000 soon.

Oil prices eased on concerns about oversupply as OPEC and its allies are due to pull back from production cuts in August while an increase in COVID-19 cases raised fears of slower pick-up in fuel demand.

Brent crude <LCOc1> futures dipped 46 cents to $43.06 a barrel, while U.S. crude <CLc1> eased 51 cents to $39.76.

(Reporting by Thyagaraju Adinarayan, additional reporting by Sujata Rao in London, Wayne Cole in Sydney and Julie Zhu in Hong Kong; Editing by Timothy Heritage and Susan Fenton)

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