As caution returns, equity rally stalls

European shares turned lower after opening higher

  
A broker looks at a graph on his computer screen on the dealing floor at ICAP in London, Britain January 3, 2018.

A broker looks at a graph on his computer screen on the dealing floor at ICAP in London, Britain January 3, 2018.

REUTERS/Simon Dawson

LONDON- World stock markets stalled at two-week highs on Thursday as increased restrictions in parts of the world to contain the spread of COVID-19 including the new Omicron variant tempered optimism on the vaccine front.

European shares turned lower after opening higher, U.S. stock futures were in the red and Japan's blue-chip Nikkei stock index slipped almost half a percent.

That left MSCI's world stock index hovering near two-week highs but struggling to make much headway after three days of gains. It has risen over 3% this week and is set for its biggest weekly rise in over 10 months.

News on Wednesday from drugmakers Pfizer and BioNTech that a three-shot course of their COVID-19 vaccine was shown to generate a neutralizing effect against Omicron in a laboratory test has cheered investors and lifted the S&P 500 within 1% of a new record high.

But market participants are now cautious amid fresh steps in many countries to contain the spread of the new variant.

Tougher COVID-19 restrictions in the UK were unveiled late on Wednesday. Investment bank Jefferies Financial Group asked staff to work from home again, raising questions about banks' efforts to return to business as usual.

"With Omicron, we still don't know the efficacy of vaccines and spread and nature of this variant," said Guy Miller, chief market strategist at Zurich Insurance Group.

"In the near-term, calling where markets go is challenging. Longer-term, we still have many drivers that favour equities," he said, adding he expected a strong macro-economic environment next year that should support company earnings.

London's FTSE index was down 0.2% with British Airways owner IAG  down 4.7%, while hotel and restaurant operator Whitbread down 1% on the latest restrictions.

"News that fresh social restrictions are being imposed in the UK...have put a brake on the rebound of not just travel stocks but bricks and mortar retailers, and hospitality firms," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

Oil prices were also on the defensive. Brent crude futures fell 0.8% to $75.24 a barrel, U.S. crude  slipped 0.6% to $72. 

The latest developments in China's troubled property sector also tempered the mood in world markets.

Developers China Evergrande and Kaisa were downgraded to "restricted default" by rating agency Fitch due to non-payment of offshore bond dues, while a source said Kaisa had started work on restructuring its $12 billion offshore debt. 

Hopes for monetary easing in China after a cut to banks' reserves ratio this week and fairly benign inflation figures on Thursday lifted Chinese shares and Asian shares outside Japan, which rose 0.6% to a two-week peak. 

China's blue chip CSI300 .CSI300 index rose 1.7% and has gained 3.6% for the week so far. .SS

Focus turned to U.S. inflation data on Friday and a Federal Reserve meeting next week for indications on the timing of a first rate hike. 

Fed funds futures are priced for rates to lift-off next May and on Wednesday two-year Treasury yields  touched their highest since March 2020 at 0.7140%.

They were steady at around 0.68%, and 10-year yields held at 1.50% after a 4.6-basis-point jump on Wednesday.

Economists expect annual headline U.S. inflation to have hit 6.8% last month.

"An acceleration in the pace of tapering by the Fed is almost being treated as a foregone conclusion," said ANZ Bank analysts, and beyond it looms an expectation of higher U.S. interest rates in 2022. "But a strong number could ramp up expectations of a hike in Q2 next year."

European Central Bank policymakers are homing in on a temporary increase in regular bond buying that would still significantly reduce overall debt purchases once its pandemic-fighting scheme ends in March, sources told Reuters. 

Elsewhere, the U.S. dollar index firmed to 96.125 and the euro weakened 0.2% to $1.1317. 

The greenback was a fifth of a percent softer at 113.46 yen , while sterling held near Wednesday's one-year low of $1.31615.

China's yuan weakened after the central bank said it would raise the foreign exchange reserve requirement ratio for financial institutions by 200 basis points from Dec. 15.

The move would force banks to set aside more of their FX deposits, a move markets believe is intended to slow the yuan's recent rapid appreciation.

(Reporting by Dhara Ranasinghe Additional reporting by Tom Westbrook in SYDNEY; Editing by Mark Potter and Bernadette Baum) ((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))


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