Trade tensions drag on stocks as markets await Fed verdict

LONDON:  Fresh trade war fears weighed on global stocks on Wednesday before a US Federal Reserve meeting, with the dollar holding firm and Britain’s pound subdued on growing fears of a no-deal Brexit.

Combative warnings from US President Donald Trump cast a shadow over Sino-U.S. trade talks, which concluded in Shanghai on Wednesday. Beijing attributed the lack of progress to Washington’s flip-flopping.

The fresh trade tensions come before a US Federal Reserve meeting that’s expected to see interest rates reduced by 25 basis points, its first rate cut in more than a decade. In focus now is on whether the Fed will leave the door open for further easing. The Fed’s decision is due at 1800 GMT.

MSCI’s broadest global stock index and Europe’s pan regional STOXX 600 both slipped 0.1%. The latter is near a fresh one-month low as worries over trade wars and Brexit offset encouraging signals from the earnings season.

London’s FTSE fell 0.1%, Frankfurt stocks gained 0.3% and Paris edged up 0.1%. US futures pointed to the main Wall Street indexes opening higher.

In focus were banks, with strong results from French lender BNP Paribas and Switzerland’s Credit Suisse countering a poor report from British bank Lloyds.

“Trade talks have finished without an agreement,” said Justin Onuekwusi, fund manager at Legal & General Investment Management. “Of course, it doesn’t help that almost as a prelude to the conversation you get tweets that are quite antagonistic.” Trump tweeted a warning to China against waiting out his current presidential term before concluding a trade deal.

Economic data underscored weakness in the eurozone economy, although markets largely shrugged off the news. Figures showed that growth in the bloc halved in the second quarter and inflation slowed sharply in July.

The slowing inflation rate is likely to strengthen market expectations that the European Central Bank, which wants to keep inflation below, but close to 2%, will further loosen monetary policy in September.

Click here https://tmsnrt.rs/2yodkWr for a eurozone inflation graphic.

In Asia, shares ex-Japan fell to a six-week low with China mainland stocks down nearly 1% and Hong Kong tumbling 1.3%. Japan’s Nikkei declined by 0.7%.

China data showing factory activity shrank for the third month in a row in July added to the sombre mood.

 In the United States, expectations for Fed easing have helped lift equities this month, with the S&P 500 index up 2.4%. Fed funds rate futures are now fully pricing in a 25-basis-point rate cut on Wednesday and another 25-basis-point cut by September.

“Exactly what happens today is far from a foregone conclusion,” Deutsche Bank’s Jim Reid said in a note to clients.

“Although the Fed have given no real encouragement to the notion of a 50 basis point (bps) cut it’s worth noting that the last time the Fed began a series of rate cuts, in September 2007, their opening move was a 50 bps cut, and a similar 50 bps cut happened when the Fed began cutting in January 2001.” Trump on Tuesday reiterated his call for the Fed to make a large interest rate cut, saying he was disappointed in the US central bank and that it had put him at a disadvantage by not acting sooner.

In currency markets, the dollar index traded flat around 98.030 after pulling back from a two-month high of 98.206 touched on Tuesday.

The dollar was also steady against the yen and the euro. The yen was undermined on Tuesday by the Bank of Japan’s decision to refrain from expanding stimulus, although it committed to doing so “without hesitation” if required.

The British pound hovered near a 28-month low hit the previous day on growing concern about a disorderly Brexit.

Sterling traded at $1.2170, not far from Tuesday’s $1.2120. It has fallen 4.2% so far this month, on course for its worst monthly performance since October 2016.

In commodities, crude oil futures rose for the fifth straight day, buoyed by a bigger-than-expected drop in US inventories. US West Texas Intermediate crude gained 37 cents to $58.41 per barrel; Brent crude futures added 41 cents to $65.13.

 Oil prices rose for a fifth day on Wednesday, supported by a larger-than-expected drop in US inventories and investor expectations that the U.S. Federal Reserve will lower borrowing costs for the first time in more than a decade. Brent crude futures rose 36 cents to $65.08 a barrel by 11:03 a.m. EDT (1503 GMT), while US West Texas Intermediate (WTI) crude futures rose 19 cents to $58.24 a barrel.

US crude inventories fell by 8.5 million barrels in the week ended July 26, the Energy Information Administration said on Wednesday. Analysts expected a decrease of 2.6 million barrels.

“The report was bullish due to the large crude oil inventory drawdown and strong demand from refiners and drivers,” said John Kilduff, partner at Again Capital Management. “Refiners are running at very high rates, and gasoline demand remains quite high, as the summer driving season persists.”

Most investors expect the Fed to cut interest rates on Wednesday. The decision is due at 2 p.m. EDT (1800 GMT) at the end of a two-day policy meeting.

A rate cut would be “a double boon for oil prices. On one hand it should encourage U.S. oil demand and on the other it will apply downward pressure on the dollar,” PVM Oil Associates analyst Stephen Brennock said.

Reuters