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Stocks up as investors eye trade talks, Brexit

Stocks up as investors eye trade talks, Brexit

Business Desk World stock markets rose on Monday, as investors eyed the resumption of trade talks between the United States and China and watched for signs of progress on Brexit. European markets took their cue from a 1 percent bounce in Chinese shares, which resumed trading after a week-long Lunar New Year holiday. The pan-European STOXX 600 index rebounded from one- week lows, helped by some deal-making and gains in mining and banking shares. Worries about a slowdown in global growth, an ongoing U.S.-China trade dispute and U.S. politics have been foremost in investors’ minds. Safe-haven bonds and the dollar have gained amid the prolonged uncertainty. Stocks have had a good year so far notwithstanding, with MSCI’S All-Country World Index up nearly 10 percent since the start of the year. The index was nearly 0.2 percent higher on Monday. The dollar reached its highest in six weeks against a basket of currencies, rising for an eighth consecutive day as investors piled into the world’s most liquid currency. The chief focus for investors for the week seemed to be the resumption of trade talks between the U.S. and China, along with Brexit. “There will be important events this week connected to two of the key global uncertainties: high-level trade talks between the U.S. and China in Beijing and UK-EU talks in Brussels. But neither looks set to produce a breakthrough, prolonging the uncertainty,” Societe Generale told clients in a note. China struck an upbeat note as talks resumed, but it also expressed anger at a U.S. Navy mission through the disputed South China Sea, casting a shadow over the prospect for improved Beijing-Washington ties. The two sides are trying to come up with a deal before a March 1 deadline, when U.S. tariffs on $200 billion worth of Chinese imports are scheduled to increase to 25 percent from 10 percent. In fixed income, fears of economic slowdown in Europe and plunging inflation expectations dominated morning trade on Monday. Germany’s 10-year government bond yield remained close to 0.10 percent. Last week, the European Commission downgraded euro zone growth forecasts for this year. Adding to worries, a collapse in talks between U.S. Democrat and Republican lawmakers over the weekend raised fears of another government shutdown. “Trade talks and shut-down (worries) are really weighing on markets,” said Sebastian Fellechner, rates strategist at DZ Bank. “We don’t see any major movements because of the general and global uncertainty.” The yield on Germany’s 10-year Bund, considered the risk-free benchmark for the region, fell as low as 0.77 percent on Friday, its lowest since October 2016, reflecting concern in bond markets about economic conditions. The rising threat to growth means equity markets will partly depend on earnings from major U.S. companies for clues about the health of consumer shares. These include Coca-Cola Co, PepsiCo Inc, Walmart Inc, Home Depot Inc, Macy’s Inc and Gap Inc . Analysts now expect first-quarter earnings for S&P 500 companies to decline 0.1 percent from a year earlier. That would be the first such quarterly profit decline since 2016, according to IBES data from Refinitiv. In Asia, China’s blue-chip index surged 1.6 percent. Shanghai’s SSE Composite climbed 1.2 percent. Australian stocks recouped some losses to end 0.2 percent lower. South Korea’s KOSPI index was up 0.2 percent. Indonesian and Indian benchmarks were in the red. That left MSCI’s broadest index of Asia-Pacific shares outside Japan slightly higher after it fell from a four-month high on Friday. Trading volumes were generally light, with Japan on public holiday. Elsewhere, the euro was barely changed at $1.1322 after five straight days of losses took it to more than two-week lows. Sterling fell to $1.2895 after UK GDP data for the fourth quarter was released. Britain’s economy slowed as expected in the final three months of last year, pushing growth in 2018 to its weakest in six years as Brexit worries hammered investment. British Prime Minister Theresa May has rejected the idea of a customs union with the European Union, ending hopes she would shift her Brexit policy to win over the opposition Labour Party. May will promise lawmakers a second opportunity to influence the Brexit talks later in the month in a bid to stave off any rebellion from within her own party by those who fear Britain could end up leaving without a deal. The Australian dollar inched up from Friday’s one- month lows, although sentiment was still cautious after the country’s central bank opened the door to a possible rate cut. Oil prices slipped on concern about slowing global demand and a pick-up in U.S. drilling activity. US crude was 0.6 percent lower at $52.42 per barrel. Brent was flat $62.12. Another report adds; Romanian bank stocks resumed a fall on Monday as central bank (NBR) governor Mugur Isarescu clashed with the government over the draft 2019 budget which includes a new tax on banks. The plan, which also increased taxes on energy firms to compensate for rising state spending, was first announced two months ago and caused a plunge in Romanian asset prices. Bucharest’s main stock index regained some ground last week amid hopes that talks between the government and the NBR could make the bank tax less painful. But the government approved the draft budget on Friday, geared towards an increase in wages and pensions, projecting 5.5 percent economic growth. Analysts see about 3 percent. The shares of lenders Banca Transilvania and BRD Groupe Societe Generale fell 6-7 percent in early trade to one-week lows ahead of a news conference by Isarescu. The governor presented the bank’s new inflation report, but also addressed the tax issue, as expected. The tax on bank assets has complicated monetary policy as it is linked with interbank interest rates, while the resulting worries over the business climate knocked the leu to record lows versus the euro last month. While Isarescu said the leu’s reaction was disproportionate, he warned that consumption boosted by a strong rise in wages was not in line with output, and that Romania had a growing current account deficit problem. He said the government should not tie the tax to the ROBOR money market rates. Data released earlier on Monday showed a 12.5 percent annual increase in the net average wage in December, and a 17 percent rise in the trade deficit in 2018 to 15.1 billion euros. Bucharest’s blue-chip stock index was down at 1.8 percent at 1016 GMT, with Banca Transilvania and BRD shares shedding over 4 percent. Central Europe’s other main indices tracked Asian and Western European peers higher, led by a 0.8-percent rise in Warsaw. With the dollar approaching 2-month highs versus the euro, the forint and the zloty—often sold when the greenback is bought—both weakened, shedding 0.2 and 0.1 percent versus the euro, respectively. The leu, meanwhile, firmed a shade to 4.7444. Isarescu said the bank revised its 2019 inflation forecast to 3 percent from 2.9 percent. Inflation retreated in the region in the past months and January figures due this week are not expected to show a big change. Romania’s government bond yields were mostly lower on Monday ahead of the auction of a seven-year paper. The 5-year yield was bid lower by 6 basis points at 4.33 percent. Meanwhile, cheap bank loans, a form of stimulus first launched by the ECB during the global financial crisis, look set to make a comeback in coming months and investors anticipate shorter term loans with a variable rate to allow the central bank flexibility. It’s just two months since the European Central Bank wrapped up its 2.6 trillion euro ($2.9 trillion) bond-buying scheme, but with euro zone growth at four-year lows and other global central banks already backtracking on policy tightening, bond market expectations of ECB action are on the rise. That’s expected to take the shape of a loan package for banks — known as Long Term Refinancing Operations (LTROs) or the more targeted TLTROs. Details could come in March or June at ECB meetings that would coincide with updates of the central bank’s economic forecasts. LTROs or TLTROs — which ECB sources say are a priority over other measures — should lower funding costs for businesses and households and offset the effect of negative interest rates on banks, investors argue. They should also boost prices — the last TLTRO round from 2016 lifted inflation by 0.3 percent over two years, Pictet Wealth Management estimates. However, the new package is unlikely to be as favorable as in the past because the economy is in better shape compared with the 2011-12 debt crisis or even 2016 when the ECB deployed a combination of TLTROs, rate cuts and increased asset buys to fight deflation. So what will the program look like? The 2016 TLTROs allowed banks to lock in lending rates as low as the ECB’s new lower deposit rate of minus 0.40 percent. The loans had a four-year maturity. This time investors expect the ECB to opt for a shorter term, say two years. “I don’t think they (the ECB) need to go as big as they did in 2016 - when there was a real deflation risk,” said Francois Savary, CIO at Prime Partners, who also anticipates fixed rate loans. “But clearly there is room to do something because the financial system in Europe has not yet fully recovered.” One idea floated is to make TLTROs a permanent facility with a floating interest rate that tracks the ECB’s Main Refinancing Operation, one source told Reuters in December. A variable rate would give the ECB leeway to raise rates moving forward, strategists said.

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