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Monday, June 25, 2018

World stocks slip as trade tensions dampen mood

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World stocks retreated on Wednesday from one-month highs, with investor focus turning from the US-North Korea summit to an expected US interest rate rise and the risk of a fresh outbreak of trade tensions between China and the United States.

Global tech stocks approached record highs and Italian yields fell, although markets remain under pressure from US plans for extra tariffs on $50 billion worth of Chinese goods.

The Mexican peso and European auto stocks, also vulnerable to trade-war risk, slipped further. Equity markets are "marking time and finding it difficult to make upward progress despite reasonably good economic data", said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.

"We are entering three days of important central bank decisions. Markets have pretty much priced what (the banks) will do and it is clear we are in a monetary policy tightening cycle," Milligan said. The US Federal Reserve is expected to announce a 25-basis-point rate increase, this year's second. The European Central Bank and the Bank of Japan also meet this week.

Tuesday's meeting between US President Donald Trump and North Korean leader Kim Jong Un has soothed some geo-political fears, as a joint statement pledged to work toward the "denuclearization" of the Korean Peninsula.

That, alongside a buoyant picture on company earnings and M&A deals, helped Wall Street close on a strong note on Tuesday, with tech stocks hitting record highs.

But trade frictions between the United States and China pushed non-Japan Asian equities half a percent lower US and took MSCI's all-country share index 0.2 percent lower US. European equities opened flat to lower . An index of auto stocks, also at risk of additional US tariffs, fell 0.25 percent.

Milligan downplayed the impact of US trade measures on global commerce volumes but noted "the direction of travel is not positive, which is why equities are not making as much progress and investor sentiment is not more positive."

In a reminder of the danger of trade disputes, shares in Chinese telecommunications giant ZTE Corp fell as much as 41.5 percent, wiping $3 billion off its market value, as it resumed trade after agreeing to pay up to $1.4 billion in penalties to the U.S. government.

Its Shenzhen shares fell by their 10 percent limit, dragging down mainland Chinese shares around 1 percent .CSI300 The Mexican peso and the Canadian dollar, caught up in trade war risks, slipped further, with the former at a 16-month low against the dollar.

As the Fed meeting approached, the dollar inched up 0.2 percent against a basket of currencies .DXY and was close to a three-week high versus the yen.Projections from the Fed's March meeting suggest a benchmark rate of 2.1 percent at end of 2018. That implies a total of three rate rises this year. But some reckon four increases are possible.

"The focus is on how many times the Fed will raise rates this year and next and how much beyond the levels it considers as neutral to the economy, or what they call the longer-run rates," said Shuji Shirota, head of macro economic strategy group at HSBC Securities in Tokyo.

The euro eased off last week's three-week high of $1.1840 but remained underpinned by expectations the ECB will mention plans to wind up its stimulus and even hint at the timing of its first interest rate rise when it meets on Thursday.

However, Italian bond yields continued to fall with two-year yields down 14 bps to below 1 percent after EU affairs minister Paolo Savona, considered a eurosceptic, said the euro was "indispensable".

---Reuters, London

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