Global markets take a breather after strong bull run

London —  World stocks paused on Monday after a strong recent run, as potential flashpoints including a crucial Brexit summit and central bank meetings loomed, and investors began to look ahead to an earnings season that may be disappointing.

Signs of further stimulus from China helped Asian shares touch seven-month highs, but investors’ enthusiasm was fleeting. MSCI’s world equity index was flat and European stocks slipped 0.2% as weak data from Germany and investor caution ahead of a string of political and monetary policy events held the market back.

In a document published on the central government’s website late on Sunday, Beijing said it would step up a policy of targeted cuts to banks’ required reserve ratios to encourage financing for small and medium-sized businesses. German exports and imports both fell more than expected in February, data showed on Monday, in the latest sign that Europe’s largest economy will likely have meagre growth in the first quarter amid increased headwinds from abroad.

Futures for the S&P 500 and Nasdaq eased 0.2%, indicating a weaker start on Wall Street. Globally, stock markets have had a stellar first quarter. The MSCI All-Country World index had its best quarter in more than eight years.

“Today’s very minor move down has to be seen in light of recent developments,” said Britta Weidenbach, head of European equities at DWS. “We’re back at the levels where the correction started last year. So now the question certainly is, what’s next?”

The European Central Bank will update the market on Wednesday, the same day as a crucial EU summit on Brexit, while China and the EU will hold a summit on trade on Tuesday.

“European institutions will be under the spotlight in the coming days as they attempt to display proactivity in trade negotiations, on Brexit and in monetary policy,” wrote economists at Swiss private bank Landolt & Cie in a note to clients.

Bond markets were being squeezed by investors’ search for yield after benchmark German Bunds fell into negative territory. Greece’s 10-year government bond yields were within a shade of their lowest level in over 13 years as a cocktail of positive headlines boosted sentiment towards the country and zero percent Bund yields push investors to riskier investments. German bund yields traded at 1 basis point, just holding in positive territory.

Reality check

The upcoming earnings season, which kicks off at the end of this week with US banks reporting, is likely to be a reality check for markets. Analysts have already slashed their earnings expectations for this year, which are now stabilising around 4.2% growth for world stocks.

“Q1 will definitely not be a good quarter for corporates, and it might well be that the market turns back to fundamentals whereas a lot of hope on China/US trade deals and developments on the interest-rate front had driven markets up year-to-date,” said DWS’ Weidenbach.

Currency markets were also distinctly risk-averse. The dollar slipped 0.1% to 97.269 against a basket of currencies. The euro inched up 0.1%, but hovered near a one-month low at $1.1229 ahead of the ECB meeting later this week. Sterling inched up 0.2% to $1.3057 as a crucial week for Britain’s negotiations to exit the EU loomed.

Prime Minister Theresa May must come up with a new plan to secure a delay from EU leaders at a summit on Wednesday as a deadline of this Friday draws ever closer.

Commodities markets were the exception, rallying strongly. London copper prices rose as much as 1% on Monday, snapping two days of declines, on expectations of more stimulus measures in top metals consumer China and optimism over Sino-US trade talks.

Oil prices rose to their highest levels since November 2018, driven by Opec’s ongoing supply cuts, US sanctions against Iran and Venezuela, and fighting in Libya. US crude was last up 39c at $63.45 a barrel, while Brent crude futures rose 42c to $70.76.

Reuters