US technology shares fell, European equities climbed and government debt sold off as investors backed out of pandemic winners and positioned instead for a global economic recovery.
In early Wall Street dealings, the tech-focused Nasdaq Composite fell 0.8 per cent, while the broader S&P 500 index slid 0.4 per cent, driven lower by tech stocks.
The yield on the 10-year US Treasury hit its highest level since last January as investors sold the debt. With government bonds under pressure from an anticipated surge in inflation that would erode the returns from fixed interest securities, the yield on the 10-year note rose 0.04 percentage points to more than 1.76 per cent. The yield on the equivalent German Bund added 0.06 percentage points to minus 0.263 per cent.
The continued rise in the US Treasury yield, which influences borrowing costs worldwide, has hit the valuations of growth stocks, contributing to the underperformance of the Nasdaq this year. The tech index has risen just 0.5 per cent during the first quarter.
Europe’s Stoxx 600 index, which advanced 0.4 per cent on Tuesday, has risen almost 8 per cent this year, following a 10.5 per cent gain in the three months to last December. The European equity benchmark, which is dominated by old-economy businesses whose fortunes are pegged to a rebound in global growth, is now within touching distance of its pre-pandemic record of 433.9 reached on February 19 last year.
The banks subsector of the European index has surged 19.8 per cent in the first quarter while its industrial goods and services businesses have notched up a 9 per cent gain.
The first quarter of this year on global stock markets “was as classic a cyclical rotation as you’ll likely see in your lifetime”, said Nicholas Colas of research house DataTrek.
The moves came as investors looked past the worsening coronavirus situation in continental Europe and bought up the bloc’s globally focused businesses.
A net 30 per cent of global portfolio managers had an overweight position on European stocks in mid-March, according to a Bank of America survey, up from 20 per cent a month earlier.
Monica Defend, head of research at Amundi, said investors were also banking on European companies achieving stronger profit growth than their US peers during the next 12 months because the bloc’s recovery from the pandemic and vaccine rollouts had been slower than in North America.
“The two regions are really running at different speeds,” said Defend. “You have more recovery further out [in Europe] than you have in the US.”
Germany’s Xetra Dax gained 0.7 per cent on Tuesday, hitting a record high. London’s FTSE 100 traded flat but was still heading for a more than 4 per cent quarterly gain after it rose 10 per cent in the preceding three months.
Emmanuel Cau, head of European equity strategy at Barclays, warned that stock market trades based on recovery from the pandemic remained vulnerable to central banks reining in the huge monetary support they began applying to markets this time last year.
“There is a lot of confusion in the market,” he said. “If you are confident about the macro economy, then at some point you worry about the next step, which is the removal of monetary stimulus.
“Perhaps we are now in a window where you can have supportive liquidity and strong growth but we are getting close to the end of the Goldilocks phase.”