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Stocks, dollar hold gains with all eyes on Fed meeting

[June 17, 2019] By Marc Jones

LONDON (Reuters) - European shares tip-toed higher alongside government bond yields on Monday, as investors braced for what is shaping up to be a crucial week for global monetary policy.

With the U.S. Federal Reserve likely to signal on Wednesday whether it is readying its first interest rate cut since the financial crisis and oil still choppy after last week's Gulf tanker attacks, most markets were hesitant first thing.

The focus was still the dollar's surge on Friday after above-forecast U.S. industrial output and retail sales data and upbeat consumer confidence soundings pushed back futures markets expectations of any quick Fed rate cut.

The greenback held its gains as most major currencies trod water, while the pan-European STOXX 600 index was also barely moved as a profit warning from Germany's Lufthansa hit airlines and canceled out a 0.8% rise in banking stocks. [.EU]

"A (U.S.) rate cut this week seems extremely premature," said Royal Bank of Canada's Global Head of FX Strategy Elsa Lignos.

"But the Fed can make some communications tweaks that at least open up the possibility for a cut in July. The question is how flexible that messaging will be."

Traders are pricing a high probability of a July rate cut, despite there being unusually high uncertainty, particularly around trade, Lignos added. She said a G20 meeting late this month could also change the narrative again.

The main concern though is if tensions do continue, the trade war could tip the U.S. and other economies into recession.

The dollar index against a basket of six major currencies The index last stood at 97.510 near a two-week high, while the euro fetched $1.1216, near the lower end of its recent trading range.

With long-term inflation expectations at an all-time low again, euro zone bond yields held close to their multi-year trough, despite inching fractionally higher early on.

European Central Bank board member Benoit Coeure said in an interview that the bank's already sub-zero interest rates could be cut again if needed. It could also restart the quantitative easing program it wound down at the end of last year.

"The question is not whether we have instruments; we do have instruments. We can change our guidance. We can cut rates. We can restart QE," Coeure told the Financial Times.

"The question is which instrument, or combination of instruments, would be best suited to the circumstances."

HONG KONG

The dollar index against a basket of six major currencies climbed to 97.583 on Friday, its highest level in almost two weeks, after the U.S. retail sales data eased fears that the world's largest economy is slowing sharply.

The index last stood at 97.510, while the euro fetched $1.1216, near the lower end of its weekly trading range.

MSCI's broadest index of Asia-Pacific shares outside Japan had ended slightly weaker overnight while Japan's Nikkei average had closed flat.

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, June 14, 2019. REUTERS/Staff

The Bank of Japan is widely expected to reinforce its commitment this week to a massive stimulus program for some time to come.

There had been something of boost from Hong Kong's Hang Seng Index which finished 0.4% higher. At the weekend, the territory's leader Carrie Lam backed down over a bill that would have allowed extradition to China.

The Hang Seng fell for three sessions in a row through Friday, after the extradition bill triggered mass protests and some of the worst unrest seen in the territory since Britain handed it back to Chinese rule in 1997.

"Last week the issue looked as if it would become another thorny point between the United States and China. As the bill is now being postponed indefinitely, things will likely calm down, which is good for markets," said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui Trust Asset Management.

Mainland Chinese shares traded within a tight range, with the benchmark Shanghai Composite up 0.2% and the blue-chip CSI 300 barely budging.

U.S. Secretary of State Mike Pompeo told Fox News on Sunday that President Donald Trump would raise the issue of Hong Kong's human rights with China's President Xi Jinping at a potential meeting of the two leaders at the G20 summit in Japan later this month.

Geopolitical tensions in the Middle East added another layer of uncertainty after the United States blamed Iran for attacks on two oil tankers in the Gulf of Oman last week.

U.S. Secretary of State Pompeo said Washington will take all actions necessary to guarantee safe navigation in the Middle East, though oil prices slipped again as worries about the broader slowdown in the global economy returned.

Brent futures fell 25 cents, or 0.4%, to $61.76 a barrel by 0900 GMT, after gaining 1.1% on Friday while logging their fourth consecutive weekly fall.

U.S. West Texas Intermediate (WTI) crude futures were down 22 cents, or 0.4%, at $52.29, having firmed by 0.4% in the previous session.

"Today, oil markets will have to digest more demand concerns as India implemented retaliatory tariffs on a number of U.S. goods yesterday," consultancy JBC Energy said in a note.

Also sapping prices was the dim outlook for oil demand growth in 2019 projected by the International Energy Agency (IEA) on Friday, citing worsening prospects for global trade.

Bitcoin jumped overnight to $9,391.85, its highest level in 13 months. It was last quoted at $9,195.62, up 2.4%.

(Reporting by Marc Jones; Additional reporting by Tomo Uetake in Tokyo; Editing by Hugh Lawson)

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