World stocks began August cautiously as U.S. lawmakers struggled to agree a new stimulus plan following a global surge of COVID-19 cases, though a squeeze on crowded short positions left the dollar clinging to a tentative bounce.
European stocks opened slightly higher on Monday following mixed moves in Asia. The pan-European STOXX 600 index rose 0.6%, helped by a rise in technology stocks, but gains were capped by poor earnings updates from big banks.
Index heavyweight HSBC (HSBA.L) warned its bad debt charges could go beyond a previous estimate to $13 billion, and France’s Societe Generale (SOGN.PA) reported a 1.26 billion euro ($1.48 billion) second-quarter loss.
E-Mini futures for the S&P 500 ESc1 were little changed, with investors nervous about the lack of a new stimulus package in the United States and White House Chief of Staff Mark Meadows not optimistic about a deal.
On Friday, Fitch Ratings cut the outlook on the United States’ triple-A rating to negative from stable, citing eroding credit strength and a ballooning deficit.
It said the direction of U.S. fiscal policy depends in part on the November presidential election and the resulting makeup of Congress, cautioning that policy gridlock could continue.
“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 US driven more by politics than necessarily economics,” said Chris Bailey, Raymond James European strategist.
But the U.S. technology sector has scaled fresh record highs, and last week Apple (AAPL.O) became the world’s most valuable company.
In Asia on Monday, China’s factory activity data 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 added 2.2%, courtesy of a pullback in the yen. South Korea shares .KS11 were flat.
In currency markets, the U.S. dollar ticked 0.1% higher as bears took profits on crowded short positions, but further gains were capped by the slowing U.S. economic recovery from COVID-19 and real rates breaking below -1% for the first time.
“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.”
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.
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%.
The dollar was last at $1.1755 per euro EUR=, after the single currency gained 4.8% in July to stretch as far as $1.1908. Against a basket of currencies, the dollar was 93.423 after touching its lowest since May 2018 on Friday.
The dollar steadied on the yen at 105.95 JPY= after hitting a 4-1/2-month low last week at 104.17.
Other major currency pairs were largely unchanged.
The decline in the dollar combined with super-low real bond yields has been a boon for gold, which had its biggest monthly gain since February 2016.
It 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, together known as OPEC+, 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.
