Investors focus on US stimulus as value and small-caps outperform

European equity markets made modest gains on Thursday, while small-cap stocks were set to open higher on Wall Street as investors awaited details on a further US stimulus spending package.

The Stoxx 600 index added 0.4 per cent in morning trading, with economically sensitive sectors including financials and consumer cyclicals leading. The UK’s FTSE 100, which has a high concentration of stocks in these so-called value sectors, rose 0.7 per cent, taking its gain so far this month to 5 per cent.

President-elect Joe Biden is expected to soon unveil his plans for a stimulus package for the US economy, having said last week the government should spend “trillions of dollars” on cheques for individuals, unemployment benefits and investments in clean energy and infrastructure.

Nick Nelson, head of European equity strategy at investment bank UBS, said the stimulus announcement would be “key” for market sentiment. “If we are going to get considerably more spending, that creates a stronger global growth backdrop.”

Futures contracts on the Russell 2000 index of smaller companies rose 0.8 per cent, while those on the broader S&P 500 traded flat. “There is a sense that Biden’s policies will be supportive for smaller and more domestically focused US companies,” said Louise Dudley, global equities portfolio manager at Federated Hermes.

Investors also have an eye on forthcoming company results. The US corporate earnings season kicks off on Friday with reports from JPMorgan Chase, Citigroup and other large banks.

Over the next week, investors’ attention may “swivel back” from the macroeconomic outlook and politics to how companies are faring, said Mr Nelson, with investors keen to find out management teams’ forecasts for a vaccine-led recovery. But “it remains difficult for businesses to look round corners”, he added.

“From a global portfolio perspective the focus at the moment is Biden and the Fed,” Ms Dudley added.

Investors have responded to Mr Biden’s fiscal plans in recent days by selling off US government debt because of concerns the spending will feed through to higher inflation, which erodes the value of Treasuries’ fixed-interest payments.

On Thursday, the yield on the US 10-year note, which moves inversely to its price, added a further 0.02 percentage points to just under 1.11 per cent, having crossed 1 per cent last week for the first time since March.

A senior Federal Reserve official on Wednesday pushed back against fears the US central bank would respond to rising inflation by increasing interest rates. Richard Clarida, vice-chairman, in remarks reported by Reuters, told a conference held by the Hoover Institution that “we are not going to hike” until inflation reaches 2 per cent.

The US labour department reported on Wednesday that consumer prices rose 1.4 per cent, year on year, in December. The increase was slightly ahead of the 1.3 per cent expected by economists polled by Reuters and Bloomberg.

Negative real interest rates, where inflation exceeds benchmark borrowing costs, would “continue to provide strong support for stock markets”, said Emily Penn, capital and investment director at insurer LV, as investors would pay higher-than-usual valuations for companies’ future earnings.