Stock markets weaken as US dollar bounce continues

Global stocks slid on Monday after their best week since November, while the US dollar regained lost ground as the pandemic worsened.

Wall Street’s benchmark S&P 500 index lost 0.8 per cent at the opening bell in New York, while the tech-heavy Nasdaq Composite slid 1.3 per cent.

European indices snapped last week’s winning streak to post losses across the board as the deteriorating health crisis drew investors’ attention. The region’s benchmark Stoxx 600 index was down 0.8 per cent by mid-afternoon, London’s FTSE 100 shed 1 per cent and Germany’s Dax lost 1.2 per cent.

“The first quarter of the year will be worse than expected because of [renewed European] lockdowns everywhere,” said Jean-François Robin, head of global markets research at Natixis. “We were expecting a bit [of a] better start to the year.”

Monday’s losses came after a strong start to the year for global equities, as the prospect of further fiscal stimulus in the US added to optimism about Covid-19 vaccines and hopes of a rebound in the global economy.

“In the near term, there’s a very real and present danger that the US could double dip in the first quarter,” said Richard Saperstein, chief investment officer at Treasury Partners. “We saw the first signs of that with the jobs report last week.”

He said the prospect of Covid-19 vaccines and further stimulus had fuelled market optimism, but that “if we start seeing further surges in hospitalisations and Covid-related deaths, I am concerned that market enthusiasm will turn in the short term”.

Salman Baig, multi-asset investment manager at Unigestion, pointed out that equity valuations remained elevated, with a large degree of optimism already priced in. “Earnings season is going to kick off in the next few weeks; depending on the tone set by some of these firms, that could be challenging, given where valuations are,” he said.

The dollar, as measured against a basket of peers, was up 0.3 per cent by afternoon trading in London, taking it 0.6 per cent higher for the year. The buck has been lifted since US Treasury yields rose last week, on bets that Democratic control of Congress would mean more stimulus for the US economy, feeding inflation.

The dollar lost about 7 per cent last year after interest rate cuts by the Federal Reserve reduced the appeal of dollar assets and encouraged investors into riskier bets, such as China’s renminbi.

But some analysts expect the dollar rally to be shortlived, with inflation expectations rising while interest rates are set to remain low for the foreseeable future.

Lee Hardman, a currency analyst at MUFG, said rising US yields were “triggering a temporary shake out of elevated short US dollar positions”, which had increased significantly over the past month.

The euro, which has rallied strongly in recent months, slipped 0.6 per cent against the dollar on Monday to $1.2147, while…