European stocks fell on Tuesday as investors appraised strong corporate earnings with rising commodity prices and evidence of supply chain bottlenecks that could hurt profit margins.
The Stoxx 600 traded flat, hovering just below its mid-April all-time high. Basic materials and energy stocks outperformed, with tech and consumer stocks declining.
The UK’s FTSE 100 rose 0.6%, with its energy and materials sub-indices up about 2%.
The US Institute for Supply Management said Monday that its producer price index jumped 4 points to 89.6 in April, the highest since July 2008. This value was obtained as the US economic recovery and vaccination campaign boosted consumer demand.
“Recent record-long lead times, widespread shortages of critical basic materials, rising commodity prices and shipping difficulties continue to affect all segments of the manufacturing economy,” said Timothy Fiore, chairman of the ISM Manufacturing Business Review Committee.
Copper hit its highest level in a decade last week, and Bloomberg’s Commodity Price Index is up nearly 17% this year. Oil on Monday remained stable, with Brent oil futures adding 0.2% to $ 67.56 a barrel.
Copper stocks in global warehouses cover “just 3.3 weeks of demand,” said Michael Widmer, a commodities strategist at Bank of America.
“The fundamentals are worrying because the global economy is just starting to open up.”
More than 60% of European companies reporting first-quarter earnings beat analysts’ forecasts, according to Morgan Stanley strategists led by Ross MacDonald.
But the Morgan Stanley team has found that investors are more likely to lower companies because of missing valuations than to buy stocks on the basis of better-than-expected performance. “Negative price bias. … …[is]the strongest we’ve seen since 2007, ”they said.
“While the data shows it is too early to see signs of pressure on margins, we think this topic will become increasingly relevant,” they added.
Other analysts believe pressure on wages could further reduce profit margins as the economy recovers. “We are not only seeing pressure on commodity prices,” said Juliet Cohen, strategist at CPR Asset Management. “As the European and American economies reopen and the service sector is in charge of the next phase of recovery, salaries may need to be raised to get employees back to work in the service sector.”
In debt markets, the yield on 10-year US Treasuries climbed 0.01 percentage points to 1.616 percent. The fall in prices came ahead of the release of data on Friday, which is expected to show that the US economy added about 1 million new jobs in April.
The US dollar gained 0.5% against a basket of currencies as traders await data on non-farm employment. The euro lost 0.4% against the dollar to $ 1.201.
The U.S. economy is set to grow at its fastest pace in decades this year, but financial conditions were not strong enough for the Federal Reserve to consider abandoning $ 120 billion a month of bond purchases, New York Fed President John Williams said in comments posted Reuters. on Monday.
The yield on Germany’s 10-year bonds remained stable at minus 0.203%.