Global stocks flat as central banks temper economic slowdown

London — Global equity markets were flat on Wednesday, hoping central bank action in the world’s biggest economies could temper some of the slowdown in world growth, even though bond yields continued to flag recessionary fears.

European shares, which broke four straight days of losses on Tuesday, held steady though bank shares got a 1% lift from comments by European Central Bank (ECB) governor Mario Draghi who signaled more assistance for banks via a cheap loans programme.

German 10-year yields, already below 0% since Friday, fell further into negative territory, while the US bond yield curve remained inverted — three-month bills are yielding more than 10-year bonds — the key signal of recession, dampened appetite for risk.

The US yield curve inversion, which has preceded every US recession for the past 50 years, triggered a sharp stock sell-off last week. The drop in yields picked up pace after the US Federal Reserve signaled a halt to its rate increases.

Markets got a reminder of global growth risks after Chinese data showed industrial profits shrank the most since late-2011 in the first two months of the year. That came after lacklustre economic data on Tuesday from Germany and the US.

However, MSCI’s all-country world equity index, which tracks shares in 47 countries, was down about 0.1% while Chinese mainland shares bounced almost 1% as expectations deepened of more central bank stimulus.

“Our view is that reflation story remains on track. We do expect the [Chinese] government to come to the rescue and provide some respite,” said Justin Onuekwusi, portfolio manager at Legal and General Investment Management.

“It feels to me that markets had priced in a lower-for-longer [interest rate] environment even before central banks. They had come a long way very quickly and now they are taking a bit of a breather. Global growth overall looks reasonably healthy, despite the slowdown.” 

Most market players agreed recession fears are real but saw no clear sign of a huge slowdown, especially with interest-rate rises receding. Draghi, too, said the eurozone’s economic soft patch did not necessarily foreshadow a serious slump and the bank could further delay rate hikes if necessary.

“Most economic forecasts, including our own, are such that the second half of the year should see a cyclical pickup in activity — but the market is pricing something different,” said Peter Schaffrik, head of European rates strategy at RBC Capital Markets.

Earlier, MSCI’s broadest index of Asia-Pacific shares outside Japan nudged up 0.1% while Wall Street was set for a firmer open, futures signaled

Bruised kiwi

New Zealand’s central bank joined its peers in the US and Europe by turning dovish — it flagged a possible interest rates cut, sending the kiwi dollar 1.6% lower to its lowest in two-and-a-half weeks.

The move also weighed on the Australian dollar.

“The market was taken by surprise by the dovish tone,” Thu Lan Nguyen, an analyst at Commerzbank said of the Reserve Bank of New Zealand. “Most central banks have turned dovish. Even those that hiked interest rates did it with a very cautious outlook on rates.”

The dollar index compared to a basket of six major currencies was up 0.1% at 96.745, building on modest gains overnight.

Questions over Brexit also limited moves for sterling , with investors awaiting fresh signs of Britain’s plan to leave the EU.

UK Prime Minister Theresa May will address Conservative Party law makers, possibly to indicate a timetable for her departure, as she tries to win support for her twice-rejected Brexit deal as parliament prepares to vote on a variety of possible options.

Oil prices were mixed, with Brent futures up 0.2% extending the previous session’s rise, but gains were kept in check amid growing fears over the impact of a global economic slowdown on demand.

In emerging markets, there were renewed concerns over Turkey and Argentina where currencies have fallen sharply in recent days. The Turkish lira liquidity squeeze has sent overnight swap rates on lira to almost 500%.

Reuters