By Sujata Rao
LONDON (Reuters) – World shares slipped off 21-month highs on Wednesday as the prospect of a U.S. rate cut was offset by reports a Sino-U.S. trade deal may be delayed, though a possible $50 billion merger between Fiat-Chrysler and PSA capped European losses.
Sentiment has also been dented by weak earnings from a swathe of companies ranging from European banking giant Deutsche to tech titan Google, and by renewed uncertainty in Britain, which is set to hold a parliamentary election on Dec. 12.
After falls of around 0.5% on Asian bourses
Broader sentiment was undermined however by a Reuters report quoting a U.S. official as saying an interim trade agreement between Washington and Beijing might not be completed in time for signing next month.
That hit Europe’s trade-sensitive tech <.SX8P> and commodity shares <.SXPP> and MSCI’s world equity index <.MIWD00000PUS> edged down after five successive sessions in the black.
Michael Hewson, chief market strategist at CMC Markets, said the deal news had not sharply lifted shares because regulatory hurdles remain, not least the French government’s stake in PSA.
“We’ve seen a lot of companies exploring M&A and I struggle to understand why this deal in particular is any more probable than the one with Renault,” he said, said referring to Fiat’s failed attempt to acquire another French carmaker.
Some caution has also crept in before the U.S. Federal Reserve announcement at 1800 GMT. Fed funds rate futures <0#FF:> price a 25 basis-point cut but markets are fixated on what signal the central bank will send.
“The Fed could be quite hawkish in terms of ‘this is it’ and send a message markets don’t really want to hear. They are pricing the Fed on a full-blown cutting path and that may not be what the Fed wants to convey,” Hewson said, noting still-robust U.S. growth and booming stock markets.
FLOOR AND CAP
World stocks are almost 3% higher this month, pushing U.S. Treasury yields to six-week highs of 1.86% while German yields are set for their biggest monthly rise since Jan 2018
Equity futures signaled a flat to weaker open for Wall Street, after the S&P500 hit a record high <.SPX>, closing lower after the trade deal report
Adding to that was a disappointing report from Google parent Alphabet
Marie Owens-Thomsen, chief economist at wealth manager Indosuez, said share prices were supported by central bank policies but “we are clearly in a slowing world economy and in that context its hard to see how companies can sell more and enlarge their profit margins.
“So there is floor put in by central banks but from here there should also be a cap (on share prices), given the economic slowdown.”
Another source of uncertainty is Britain’s Dec. 12 snap election, which could throw the future of Brexit up in the air again if no party wins a conclusive majority.
That has dampened recent UK market cheer, with sterling losing 1.2% in the past week. On Wednesday it firmed modestly versus the dollar and euro around $1.29 and 86.3 pence respectively
The dollar retreated 0.1% against other major currencies <.DXY> before the Fed and an advance reading of third-quarter U.S. economic growth.
Against the yen, the greenback was steady at 108.87 yen
Tohru Sasaki, head of Japan markets research at JPMorgan Chase said a hawkish Fed message could send the dollar/yen above 110 yen but he added that “if the market is going to price in two more cuts after this month’s expected cut, the pair could fall to mid-107 yen level”.
(Reporting by Sujata Rao; additional reporting by Hideyuki Sano in Tokyo, Editing by Timothy Heritage and Alison Williams)