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European stocks fall ahead of monthly US jobs report

European equities dropped on Wednesday as investors turned cautious ahead of US jobs data that could pressure the Federal Reserve to dial back its pandemic-era monetary stimulus.

The Stoxx Europe 600 fell 1 per cent by late morning in London, although it remained on course for a gain of more than 1 per cent in June.

The European equity gauge has not had a down month since January and has traded around record highs throughout June, along with Wall Street stock markets. But analysts said the next moves by the Fed could be more significant than upcoming quarterly earnings reports.

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Analysts have upgraded their 2021 earnings per share forecasts for global companies by 15 per cent since January, according to research by Citi. Those following US and European businesses whose fortunes are linked to economic cycles, such as industrial groups and materials producers, have increased their earnings forecasts the most, Citi found.

But prices of companies’ equity and debt instruments had already been lifted so high by this optimism that “everywhere you look there is nothing left in terms of value”, said Tatjana Greil Castro, co-head of public markets at Muzinich & Co.

“So now everything is about the Fed and how much liquidity they will continue to pump into markets,” she added.

Friday’s non-farm payroll report is expected to show the nation’s employers added close to 700,000 jobs in June, from 559,000 the previous month.

The US central bank broadly pledged to keep monetary policy accommodative until the labour market healed from last year’s economic shocks, although some of its policymakers have since signalled they believe this is getting close.

On Tuesday, Fed governor Christopher Waller told Bloomberg TV that “we are now in a different phase of economic policy, and so it’s appropriate to start thinking about pulling back on some of the stimulus”.

The Fed has purchased $120bn of bonds a month since last March under a monetary stimulus programme that raised government debt prices and reduced their interest yields, in turn making equities a more attractive investment.

Caution also crept into markets on Wednesday about the intensifying spread of the Delta variant of Covid-19. European travel stocks dropped 1.2 per cent, taking their weekly fall to close to 6 per cent.

The dollar index, which measures the greenback against major currencies, held at around its highest since early April.

Prices of other haven assets also firmed. The yield on the benchmark 10-year US Treasury bond, which has sat below 1.6 per cent for most of June as traders waited for clear monetary policy signals, dropped 0.02 percentage points to 1.459 per cent. Germany’s equivalent Bund yield fell by the same amount to minus 0.193 per cent.

The euro, which has lost more than 2 per cent against the dollar this month, slid 0.1 per cent to $1.188.

In Asia, Hong Kong’s Hang Seng index closed 0.6 per cent down and Tokyo’s Topix dropped 0.3 per cent.

Brent crude, the international oil benchmark, rose 0.7 per cent to $75.28 a barrel.

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