Eurozone rally strengthens as Italy’s borrowing costs shrink

Eurozone assets continued to bask in the afterglow of Tuesday’s landmark deal on a €750bn package to fund the bloc’s recovery from the coronavirus emergency.

European stocks resumed their march higher and the euro extended its gains, while Italy’s 10-year borrowing costs sank below 1 per cent for the first time since early March, having surged to nearly 2.5 per cent at the height of the crisis.

Analysts said the plans to let Brussels borrow unprecedented amounts would take the pressure off the euro area’s more fragile economies.

“We think Europe can outperform in the near term, with the catalyst provided by agreement on the EU recovery fund and better economic growth,” said Sharon Bell, European strategist for Goldman Sachs.

The continent-wide Stoxx 600 equity index rose 0.5 per cent by lunchtime in London, clawing back some of its losses from a day earlier. Frankfurt’s Xetra Dax added 0.6 per cent, while London’s FTSE 100 climbed 0.6 per cent.

Futures pointed to a 0.4 per cent opening gain for the S&P 500 when Wall Street starts trading later, after staging a late rally on Wednesday following better than expected corporate earnings.

Positive results from clinical trials for potential coronavirus vaccines at the start of the week also helped equity investors shrug off an escalation in US-China hostilities.

The dollar extended its decline, putting it on track to record its lowest level since September 2018. The US currency slipped slightly against a basket of peers, taking losses over the past 50 days to about 5 per cent.

The fall in the dollar follows a slide in real yields, which adjust the nominal yield on bonds based on expected consumer price changes, on US Treasuries to their lowest level since 2012. The real 10-year US Treasury yield fell to minus 0.91 per cent on expectations of more action by the Federal Reserve to prop up the economy.

Line chart of showing US dollar hits lowest level since September 2018

Analysts at MUFG said that the dollar, a haven currency, could strengthen if concerns about the spread of coronavirus in the second half of the year returned to the fore for traders.

“The main risk to the US dollar’s current bearish trend is if market confidence in the global recovery takes a significant hit,” they said.

Gold added 0.5 per cent at $1,881 a troy ounce, extending its ascent as investors searched for stores of value amid falling returns on bonds.

Chinese stocks and the renminbi stabilised after being shaken by Washington ordering the closure of the country’s consulate in Houston on Wednesday. Beijing has warned that it will retaliate unless Washington reconsiders the diplomatic post’s closure, which it said “seriously violates” the norms of international relations.

China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks closed flat after falling as much 2.1 per cent on Thursday. China’s onshore renminbi was down 0.1 per cent at Rmb6.9935 against the dollar after the country’s central bank on Thursday set its permitted trading band at a weaker level.

The consulate spat has spooked Chinese traders who enjoyed a world-beating rally in the local market this year.

“The situation will get even worse and I expect further action taken from both sides,” said Dickie Wong, head of research at Hong Kong-based Kingston Securities.

Elsewhere in Asia-Pacific, South Korea’s Kospi index dropped 0.6 per cent after official data showed that the Asian country had fallen into recession for the first time in nearly two decades.

Oil prices rose, with Brent crude, the international benchmark, gaining 1 per cent to push towards $45 per barrel.