By Marc Jones
LONDON (Reuters) - A five-day charge by world stocks fizzled on Tuesday as caution about renewed coronavirus lockdowns took hold again, though it was not enough to douse China's July hot streak.
London, Paris and Frankfurt were down around 1% by early afternoon and Wall Street looked set for a drop, too, as investors shifted back into the dollar and government bonds.
Tokyo, Hong Kong and Seoul all lost ground in Asian trading. Shanghai's blue-chip index was sputtering by the close after adding to its 15% gains over the past week.
New coronavirus cases have surged in several U.S. states, forcing some restaurants and bars to close again, in a setback to the budding recovery that had been propelling risk assets.
Lockdown measures were also reimposed in Melbourne, Australia, confining its nearly 5 million residents to all but essential travel for another six weeks.
The move was announced just before the state border between Victoria, of which Melbourne is the capital, and New South Wales, which contains Sydney, is scheduled to close.
"Just when many parts of the world looked to have got to grips with the coronavirus pandemic, many jurisdictions re-imposed lockdowns to contain a surge in new cases," said Luca Paolini, chief strategist at Pictet Asset Management.
Corporate earnings are expected to fall by about 20% percent this year following the deepest recession in more than a century. Pictet expects a 30% to 40% slump.
"But that does not mean equity and corporate bond markets are due a sharp fall," Paolini said, predicting the U.S. Federal Reserve will inject another $1.3 trillion of stimulus this year and the European Central Bank will add another 1.1 trillion euros ($1.24 trillion).
The euro zone economy will drop into a deeper recession this year than previously thought and take longer to rebound, the European Commission forecast on Tuesday. France, Italy and Spain are struggling the most.
Expectations are for a record 8.7% slump, then a 6.1% recovery in 2021. In early May, the commission had forecast a 2020 downturn of 7.7% and a 2021 rebound of 6.3%.
Analysts said signals from the Chinese government through a state-sponsored journal on "fostering a healthy bull market", published on Monday, had helped the buying binge in Chinese shares.
The current China rally has echoes of the past, especially during 2007 and in 2015, which was largely driven by Chinese retail investors.
"Shades of John F. Kennedy's 'Ask not what your country can do for you' inauguration speech here and as close as you might get to a Chinese government 'put' as anything the Fed has done to date vis-à-vis the U.S. stock (and credit) markets," said Ray Attrill, head of FX strategy at NAB, in a research note.
A rebound in U.S. services in June, almost returning to pre-pandemic levels, had also helped to whet investors' risk appetite.
(Graphic: World's biggest stock markets since start of 2020, https://fingfx.thomsonreuters.com/gfx/mkt/gjnvwwkrovw/Pasted%20image%201594112037896.png)
TROUBLING TIMES
In the currency market, the Chinese yuan edged to its highest levels in nearly four months. The renminbi rose 0.1% to 7.0115 per dollar though it was a small-scale move compared to Monday's near 1% jump.
"The yuan is supported by the risk-on mood in the Chinese share market despite lingering uncertainties over the U.S.-China relations and an anticipated slow pace of recovery," said Ei Kaku, senior strategist at Nomura Securities.
Other major currencies were struggling as the dollar regained traction. The yen was flat at 107.41 to the dollar, the euro slipped back to $1.1275 and the Aussie dollar dropped 0.5% after headlines of Melbourne's lockdown..
Gold dipped but was still near an eight-year peak at $1,776 per ounce. Copper was weaker in London trading, having hit a five-month high as part of the China charge in Asia.
Oil prices were also struggling. Brent crude lost nearly 1% to $42.69 per barrel and U.S. West Texas Intermediate crude fell to $40.24.
With 16 U.S. states reporting record increases in new COVID-19 case in the first five days of July, according to a Reuters tally, there is renewed concern about demand for fuel in the world's biggest oil-consuming country.
Florida is reintroducing some limits on economic re-openings to grapple with rising cases. California and Texas, two of the most populous and economically crucial U.S. states, are also reporting high infection rates.
"There are a couple of things that we are seeing, and some of them are troubling and might suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise," Atlanta Federal Reserve Bank President Raphael Bostic told the Financial Times.
The U.S. death toll from the coronavirus has now topped 130,000, Reuters calculations show.
(Graphic: Coronavirus and financial markets, https://fingfx.thomsonreuters.com/gfx/mkt/xegvbmbdkpq/Pasted%20image%201594123352010.png) (Graphic: Central banks' balance sheets to the rescue, https://fingfx.thomsonreuters.com/gfx/mkt/rlgvdlnezvo/Pasted%20image%201593424971998.png)