Wall Street was set for another positive session, while European equities rallied after data showed Germany’s historic economic collapse was less severe than feared.

S&P 500 futures gained 0.4 per cent at the New York open, suggesting the index will add to its 4.9 per cent rise so far in August, with optimism buoyed by positive developments in US-China trade talks. The gauge rose the previous day, setting a new record high.

Investors also retreated from bonds while the euro firmed. This came after the US and China reaffirmed a commitment to their “phase one” trade talks, in a rare sign of co-operation following weeks of wrangling over issues such as the future of Chinese social media platform Tik Tok in the US.

German gross domestic product contracted 9.7 per cent in the second quarter, which was the height of the coronavirus pandemic in Europe, as private consumption, investments and exports collapsed. An earlier reading had shown the economy shrinking by 10.1 per cent between April and June.

Meanwhile, a survey by Germany’s highly regarded Ifo Institute showed sentiment among business leaders in Europe’s biggest economy improved to its highest level since February. The research group’s business climate index rose to 92.6 for August, up from 90.4 in July.

The data boosted the euro, which rose 0.2 per cent against the dollar to purchase $1.1814. Germany’s Dax index was 0.7 per cent higher while France’s CAC 40 gained 1 per cent. The Europe Stoxx 600 rose 0.6 per cent.

The yield on the 10-year US Treasury rose 3 basis points (0.03 percentage points) to 0.68 per cent while gold lost 0.4 per cent to trade at $1,926 per troy ounce. Germany’s 10-year bond yield, which moves inversely to prices, rose 6 basis points to minus 0.39 per cent.

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Monica Defend, head of global research at asset manager Amundi, said she was “really struggling with the idea that the S&P 500 will continue to climb.”

She argued that while markets were pricing in a V-shaped recovery for the US economy, “we are expecting something less resilient,” after US jobless claims rose back above 1m last week. She added, however, that she expected US inflation, which is traditionally negative for stocks and bonds, to remain low.

Investors are struggling with contradictory views on inflation, which has become harder for economists to forecast because of the pandemic.

Many are looking to the Jackson Hole meeting of central bank governors, which will be held on Thursday and Friday in a virtual format, for clues.

“We are hoping for more colour on inflation targeting from [Federal Reserve chairman] Jay Powell at Jackson Hole,” Ms Defend said.

The German GDP data were a “final glance in the rear-view mirror”, wrote Carsten Brzeski of ING, predicting a recovery in the July-to-September quarter because of a reduction in value added tax and summer domestic tourism. “The economy will have one of its best quarterly performances ever in the third quarter,” he said.

Shamik Dhar, chief economist at BNY Mellon, said that, while coronavirus cases were once again rising across Europe, hospitalisation and death rates did not appear to be heading back towards the levels seen in March and April.

“The course of the disease remains hugely uncertain and this latest spike may lead to more regional lockdowns,” he said. “But my essential view is that Germany will bounce back,” he added, in part because of pent-up consumer demand.

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In London the FTSE 100, which has lost almost a fifth of its value during 2020 as fears over the economic impact of Covid-19 and Brexit mount, traded flat. Shares rose across Asia-Pacific for a second day, with MSCI’s benchmark up 0.4 per cent.

Brent crude, the international oil benchmark, added 0.5 per cent to $45.37 a barrel.

Via Financial Times