Equity rally shows signs of running out of steam

The strong rally enjoyed by US and European equities in recent sessions showed signs of slowing down yesterday in spite of further encouraging economic data and central bank action to boost growth.

Profit-taking, in particular among technology stocks, led Wall Street lower even as most observers took a relaxed attitude to the outcome of the US government's “stress tests” on leading banks.

But other beneficiaries of the recent improvement in risk appetite, such as credit default swaps and commodity prices, maintained their positive tone.

The underlying mood surrounding equities remained cautiously optimistic.

“Equities as an asset class are being rehabilitated,” said Kevin Gardiner, head of global equity strategy at HSBC. “While a setback in the near future would not be surprising, we would not expect it to be large or last long.”

Analysts pointed to the breadth of the recent rally. Ian Harnett at Absolute Strategy Research noted that 50 per cent of shares on the European DJ Stoxx 600 index were up 50 per cent from their 52-week lows.

“The bottom line is that scale, duration and now breadth mean that this rally is looking a lot less like a typical ‘bear market' rally and more like a ‘broad market rally',” Mr Harnett said. “Talking with clients it is apparent that even the ‘bulls' would like to see a 10 per cent pull-back . . . That suggests that the ‘pain trade' is for further gains.”

By midday in New York, the S&P 500 was down 0.6 per cent and the technology-heavy Nasdaq Composite was 1.7 per cent lower.

In Europe, the FTSE Eurofirst 300 index fell 0.8 per cent, while the FTSE 100 in London managed a meagre 0.1 per cent rise.

The mood remained sanguine in Asia, however, particularly as Japanese investors played catch-up after a three-day holiday. The Nikkei 225 Average climbed 4.6 per cent to a six-month closing high, while the Hang Seng index in Hong Kong rose 2.3 per cent, a sixth successive advance.

Further positive news came from the money markets as interbank lending rates continued to fall across the board.

There was no stopping commodities as the benchmark US oil price briefly topped $58 a barrel to touch a six-month high. Gold edged higher and base metals had a broadly positive day.