Global Shares Muted as Prospect of US Cut Fades

Reuters

LONDON: Global stocks were in a muted mood on Monday after strong US job gains tempered expectations the Federal Reserve will deliver a large rate cut, while Deutsche Bank shares fell after a major restructuring.
Sentiment was dampened by US investment bank Morgan Stanley’s decision to reduce its exposure to global equities due to misgivings about the ability of policy easing to offset weaker economic data.
In Turkey, the lira, stocks and government dollar bonds weakened after President Recep Tayyip Erdogan dismissed the central bank governor, fueling fears about monetary policy independence.
European stocks moved little, with the pan-European STOXX 600 index adding 0.04 percent.
Top movers on the STOXX 600 included TGS Nopec, up 6.7 percent on an earnings update. US futures pointed to a lower opening for Wall Street, with E-Minis for the S&P500 at -0.2 percent.
In Asia, there was a wide sell-off in stocks, with MSCI’s broadest index of Asia-Pacific shares outside Japan losing 1.4 percent and China’s blue-chip CSI300 index down 2.32 percent, its biggest daily loss since May 17.
“We are lowering our exposure to global equities to the range we consider ‘underweight’,” Morgan Stanley’s London-based strategist Andrew Sheets said in a note. The previous range was “neutral.”
Expensive valuations and pressure on earnings were among the reasons for the downgrade, Sheets said, while the bank increased its exposure to emerging markets sovereign credit and safe haven Japanese government bonds.
Since the start of the year, global equities have been bolstered by expectations central banks will keep interest rates at or near record lows to boost economic growth.
Those were tempered by a US labor report on Friday that showed nonfarm payrolls jumped 224,000 in June, beating forecasts of 160,000, a sign that the world’s largest economy still had some fire.
Given the strength shown in that data, investors now expect US Federal Reserve Chairman Jerome Powell to slow rate cuts this year.
“The re-adjustment in expectations did push the dollar higher and had a negative effect on Asia but Europe has been supported by investors saying ‘whatever the Fed does, the ECB (European Central Bank) will still cut’,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.
Trading is expected to be subdued ahead of Powell’s testimony to the US Congress on Wednesday, which will give clues on the near-term outlook for monetary policy.
The Greek stock index rallied at the open to hit a new February 2015 high before erasing gains and slipping 1.3 percent as traders booked profits after Greece’s conservatives took power after victory in snap elections on Sunday.
Greek 10-year bond yields fell by 14 basis points in early trade to hit new all-time lows of 2.016 percent, reversing the 12 basis point yield rise on Friday.
Currencies
There was some positive news on the protracted China-US trade war, with White House Economic adviser Larry Kudlow confirming that top US and Chinese delegates will meet this week for trade talks.
“Whether the negotiators can find a solution to the difficult structural issues that remain between the two sides is another matter, and Kudlow cautioned there was ‘no timeline’ to reach an agreement,” National Australia Bank strategist Rodrigo Catril said.
In currency markets, the Turkish lira was down 2 percent against the dollar after Turkey’s Central Bank’s Murat Cetinkaya was replaced by his deputy Murat Uysal.
Erdogan sacked Cetinkaya for refusing the government’s repeated demands for rate cuts, laying bare differences between them over the timing of interest rate cuts to revive the recession-hit economy.
The dollar index stood at 97.233, down marginally on the day but near the 3-week high of 97.443 hit on Friday.
The euro, which dropped to $1.1208 on Friday, traded at $1.1225.
After hitting a six-month low to the dollar on Friday as a result of poor economic data and a rise in expectations that the Bank of England will cut interest rates, the pound edged down to $1.2530.
Geopolitics may be in focus this week following news on Sunday that Iran will boost its uranium enrichment, in breach of the 2015 nuclear deal.
“So far tensions have not had a material impact on markets, but if they escalate it could be a different story,” said Catril.
In commodity markets, Brent crude futures were down 0.09 percent to $64.18. US West Texas Intermediate was 0.12 percent down at $57.44 a barrel, and Spot gold gained 0.4 percent to $1,404.48 an ounce.

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