Rising commodity prices put pressure on European stock rally

European equities drifted on Tuesday as investors weighed up strong corporate earnings with surging commodities prices and evidence of supply chain bottlenecks that could depress businesses’ profit margins.

The Stoxx 600 traded flat, hovering just below its all-time high reached in mid-April. Basic materials and energy stocks outperformed, with shares in technology and consumer-focused businesses falling into the red.

The UK’s FTSE 100 rose 0.6 per cent, with its energy and materials sub-indices each gaining about 2 per cent.

The US Institute for Supply Management said on Monday that its index tracking prices paid by manufacturers jumped 4 points to 89.6 in April, the highest reading since July 2008. The reading came as the US economic recovery and vaccination drive boosted consumer demand.

“Recent record-long lead times, widescale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy,” said Timothy Fiore, chair of the ISM manufacturing business survey committee.

The price of copper hit its highest level in a decade last week, while a commodity price index compiled by Bloomberg has gained almost 17 per cent this year. Oil was steady on Monday, with Brent crude futures adding 0.2 per cent to $67.56 a barrel.

Stocks of copper in global warehouses cover “just 3.3 weeks of demand”, said Michael Widmer, commodity strategist at Bank of America.

“The fundamental backdrop is so concerning because the global economy is just now starting to open up.”

More than 60 per cent of European companies that have reported first-quarter earnings have beaten analysts’ forecasts, according to Morgan Stanley strategists led by Ross MacDonald.

But investors have been more likely to mark companies down for missing estimates than to buy shares on the basis of better than expected performance, the Morgan Stanley team found. “The negative skew to price action . . . [is] the strongest we have seen since 2007,” they said.

“Although the data are suggesting it’s a little early to see signs of margin pressures yet, we think this theme will become increasingly relevant,” they added.

Other analysts said wage pressures could further dent businesses’ profit margins as economies reopen. “We not only see pressure on input prices,” said Juliette Cohen, strategist at CPR Asset Management. “As the European and US economies reopen and the services sector is responsible for the next stage of the recovery, perhaps salaries will have to rise to get employees back into work in service industries.”

In debt markets, the benchmark 10-year US Treasury yield ticked 0.01 percentage point higher to 1.616 per cent. The drop in price came ahead of data on Friday that is expected to show the US economy added close to 1m new jobs in April.

The dollar, as measured against a basket of currencies, strengthened 0.5 per cent as traders looked ahead to the non-farm payrolls data. The euro lost 0.4 per cent against the dollar to $1.201.

The US economy will grow at the fastest rate in decades this year, but financial conditions were not strong enough for the Federal Reserve to consider pulling back its $120bn a month of bond purchases, New York Fed president John Williams said in comments reported by Reuters on Monday.

Germany’s 10-year Bund yield was steady at minus 0.203 per cent.

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