World equities hold near one-week low
World stocks hovered close to their one-week lows, dragged down by an earlier two per cent slump in Japan and lackluster European markets, while concern over Britain’s future in the European Union continued to weigh on sterling.
European stocks inched into positive territory, but their gains were capped by investor reluctance to take big positions before a press conference by European Central Bank President Mario Draghi after the ECB’s regular meeting.
The central kept interest rates deep in negative territory and stuck to its stimulus policies, confirming it would start buying corporate bonds from June 8 as part of a program to revive growth and inflation.
The hope now is that Draghi will be able to nudge up the bank’s inflation projections, breaking a damaging cycle of having to cut forecasts quarter after quarter.
More broadly, however, political concerns such as Britain’s Brexit vote are combining with persistent worries over the world economy to keep markets in a dour mood, especially after a series of disappointing manufacturing data in China and Europe this week.
“We are treading water at best these days, fighting the headwind of all sorts of nasties such as Brexit in the UK. We don’t have a clear picture of where global growth is going to go – as some regions show signs of recovery, others drop away again,” said Peter Lowman, CIO of Investment Quorum, a UK-based wealth manager.
In the United States, manufacturing grew for a third straight month in May, but factories appeared to be taking fewer deliveries from suppliers, potentially curbing future production.
Those figures along with other recent data have served to make markets more confident that the Federal Reserve will hold off on raising U.S. interest rates in June.
That pushed the dollar further off two-month highs hit earlier this week against a basket of currencies. Against the yen, the dollar reached two-week lows, falling half a percent.
The Japanese currency has been boosted by safety-seeking flows driven by Brexit worries, but also the government’s decision to delay a sales tax hike. But that dragged down the export-heavy equity index by 2.3 percent, its biggest one-day loss in a month.
MSCI’s world equity index – a compilation of stocks from 45 countries – was flat .
Lowman said uncertainty over economic recovery worldwide could delay rate increases even further to September.
“What (Federal Reserve Chair Janet) Yellen doesn’t want to do is create a crash in financial assets and kill off what growth they have got,” Lowman added.
Expectations the ECB will raise growth and inflation forecasts supported the euro on foreign exchange markets, but the pan-European STOXX 600 and FTSEurofirst 300 indexes gave up earlier slight gains to trade flat.
There is also a chance the ECB will signal the return of a funding lifeline for Greek banks and those hopes helped the country’s bond yields to hold near six-month lows hit last week.
Along with the ECB, an OPEC meeting in Vienna was also in focus. While the group is not expected to restrict crude output to support prices, outages in several countries helped support Brent futures just below $50 a barrel [O/R].
British markets remained in thrall to the Brexit debate as the June 23 referendum on the UK’s European Union membership approaches. While a YouGov poll published on Wednesday showed British voters evenly split between “Remain” and “Leave”, two surveys the previous day showed a move towards leaving the EU.
Britain’s hefty current account deficit – 7 percent of output in the last quarter of 2015 – makes the economy, and the currency, vulnerable to any pull-back in investment flows.
“I think currency is quite often the first place that investors vent their concerns. There’s likely to be a quite rapid downward movement in sterling,” said James Binny, head of currency, EMEA, at State Street Global Investors.
Sterling has lost more than 1 percent this week against the dollar and is currently near two-week lows. The cost of hedging against swings in the currency in options markets is just off seven-year highs [GBP/]
Attention is shifting now to U.S. non-farm payrolls data on Friday. Private ADP jobs numbers due later on Thursday may also provide clues on the state of the world’s biggest economy.