Global equities steady as investors weigh oil cuts

Global stocks held steady on Tuesday as investors balanced the inflationary force of rising oil prices with hopes that central banks would not over-tighten monetary policy into a potential recession.

MSCI’s broadest index of world stocks, which rose almost 6% last month as the US Federal Reserve paused its cycle of aggressive rate hikes, was flat in light trading, with Wall Street closed for the July 4 holiday.

Europe’s Stoxx 600 share index added 0.2%.

Earlier in the day, Australia’s central bank kept interest rates steady at 4.1%, saying it needed time to assess the economic impact of its hikes so far.

Complicating the outlook for inflation, oil prices rose on Tuesday as markets weighed supply cuts for August by top producers Saudi Arabia and Russia.

Brent crude futures climbed 0.9% to $75.35 a barrel, while West Texas Intermediate was up 1% at $70.46.

Data on Monday from the Institute of Supply Management (ISM) shows US manufacturing activity slumped in June to levels last seen during the initial wave of the Covid-19 pandemic in May 2020. Purchasing managers surveys showed a similar factory downturn in the eurozone.

“At least the improved supply-demand imbalance seems to be having an effect on price pressures,” Capital Economics global economist Ariane Curtis said.

Despite evidence that goods inflation was easing, Curtis cautioned that central bankers might keep policy tight to battle service-sector inflation “which has proven stickier”.

In the US, Barclays analysts said in a note to clients that “rising real incomes, thanks to a strong labour market, will continue to support consumption”, despite the recessionary signals from the weak ISM data.

Mixed bag of data

Investors are watching out for a mixed bag of economic data ahead of second-quarter earnings while uncertainty remains over the outlook for Fed monetary policy, said Manishi Raychaudhuri, head of Asia Pacific equity research at BNP Paribas.

The minutes from the central bank’s most recent meeting are due later this week and could provide additional clues on policy direction, but also inject some volatility, he said.

“If the Fed tightens too much and decides to do more rate hikes than twice, as the market widely expected, then there’s a concern that the recession may turn out to be deeper than what is being factored in,” Raychaudhuri said.

Geopolitical tensions also persist, he noted, with China’s export controls on minerals adding more uncertainty around global trade relations.

In the currency market, the dollar index, which tracks the greenback against six major peers, was flat. The euro dipped 0.1% lower to $1.0898.

Eurozone government debt was steady, with Germany’s two-year Schatz yield, which tracks interest rate expectations, drifting around the 3.32% level, the highest since early March just before a US regional banking crisis drove a flight to havens. Bond yields rise as prices fall.

The Treasury market was shut on Tuesday for Independence Day. On Monday, a widely watched section of the US Treasury yield curve hit its deepest inversion since the high inflation era of the early 1980s, reflecting financial markets’ concerns that an extended hiking cycle may tip the US into recession.

Reuters