US stocks fall as Europe ticks up; yen bounces ahead of BoJ

Oil prices slide on oversupply worries

LONDON, July 26, (Agencies): A buoyant yen and oil prices at their lowest in three months kept stock markets on the defensive on Tuesday as investors awaited central bank meetings this week that will unveil new stimulus in Japan and may provide clues on US interest rates.

US equity markets fell while stocks in Europe traded slightly above break-even as gains in major healthcare and consumer goods stocks propped up European equities to offset persistent concerns over the region’s banking system.

The yen hit two-week highs against the euro and more than one-week highs against the dollar as traders dialed back expectations of how much new stimulus authorities will inject into Japan’s ailing economy at the end of the week.

Most economists surveyed by Reuters expect the Bank of Japan to expand its asset purchases and cut rates further below zero at a two-day meeting that ends on Friday.

Comments by Japan’s finance minister, Taro Aso, raised concerns that the government will not work as closely with the BOJ to implement new stimulus as investors had hoped.

MSCI’s all-country world stock index traded near break-even, while the pan-European FTSEUROFIRST 300 index rose 0.2 percent to close at a provisional 1,348.04. The Dow Jones industrial average fell 73.66 points, or 0.4 percent, to 18,419.4. The S&P 500 slid 4.59 points, or 0.21 percent, to 2,163.89 and the Nasdaq Composite lost 2.48 points, or 0.05 percent, to 5,095.15.

The US Federal Reserve is expected to leave interest rates unchanged when it concludes its two-day meeting on Wednesday. Investors are looking for any signs that the US central bank might be more likely to hike rates in coming months.

Data showed US consumer confidence holding steady in July while new singlefamily home sales hit their highest level in nearly 8-1/2 years in June, suggesting sustained momentum in the economy.

Other data showed moderate gains in house prices in May, which should support consumer spending and keep home purchasing affordable, especially for first-time buyers who have started venturing into the housing market.

The US central bank is widely expected to leave its target on policy rates at 0.25 percent to 0.50 percent this week due to global risks, but traders seemed wary of signals the Fed would consider raising rates by year-end on signs the economic expansion remains on track.

US

US stocks swung between small gains and losses on Tuesday afternoon as mixed earnings reports kept investors on the edge ahead of the Federal Reserve’s two-day policy meeting and Apple’s results.

A set of strong economic data, including Tuesday’s housing report, could strengthen the case for the Fed to raise rates earlier than the market anticipates.

Traders have priced in an 18.7 percent chance of a rate increase in September and a 42.8 percent chance in December, according to CME Group’s FedWatch tool.

“Investors have had the opportunity to drink from a fire hydrant of information,” said Eric Wiegand, senior portfolio manager at the Private Client Reserve at US Bank.

“But appetite is likely to increase when markets close today and after the Fed’s comments on interest rates tomorrow.”

Apple, which is expected to report a fall in third-quarter profit, was trading largely unchanged at $97.33.

At 13:02 pm ET, the Dow Jones Industrial Average was down 36.54 points, or 0.2 percent, at 18,456.52.

The S&P 500 was down 1.08 points, or 0.05 percent, at 2,167.4.

The Nasdaq Composite index was up 8.27 points, or 0.16 percent, at 5,105.90.

Five of the 10 major S&P sectors were lower, led by a 1.4 percent drop in the telecom services index. Verzion shares fell 2 percent after the company’s subscriber numbers fell below estimates.

McDonald’s dropped 4.3 percent to $121.89 after the restaurant chain’s comparable sales missed analysts’ expectations. The stock weighed the most on the Dow.

Gilead fell 8 percent after the drugmaker cut its full-year sales forecast, attracting a host of price target cuts.

Caterpillar’s shares jumped 4 percent to touch a year high after the company’s quarterly earnings beat expectations. The stock was the top gainer, boosting the Dow.

Europe

Gains in major healthcare and consumer goods stocks propped up European equities on Tuesday, partly offsetting persistent concerns over the region’s banking system.

The pan-European STOXX 600 index closed up 0.1 percent, while the similar FTSEurofirst 300 index advanced 0.2 percent.

Healthcare stocks outperformed to add the most points to the market, with Danish insulin maker Novo Nordisk climbing 2.9 percent after brokerage Nordea forecast another boost for the company’s Victoza diabetes product.

Some consumer goods and leisure stocks also outperformed, with Hermes, drinks maker Campari and sportswear company Adidas all touching record highs.

Berkeley Futures associate director Richard Griffiths said those stocks were benefiting from being considered as relative “safe havens”, given the market uncertainty following Britain’s shock vote in June to quit the European Union.

Other traders added that record low interest rates in the euro zone were helping consumer goods companies as lower rates could encourage people to spend more in spite of the weakening economic outlook caused by Brexit.

“Those safe-haven sectors such as healthcare and consumer goods are well supported,” said Griffiths.

However, bank stocks came under renewed pressure before Friday’s release of European-wide stress tests.

Banks have been the worst sectoral performer this year due to concerns over capital being squeezed by margin pressure caused by ultra low interest rates.

Commerzbank shares fell 4.5 percent after the German lender posted a decline in second-quarter core capital.

The FTSE Italia All Share Banks index also dipped 0.3 percent, with the index down around 50 percent in 2016 due to worries about Italian banks’ bad debts.

Asia

Most Asia markets rose Tuesday but Tokyo sank on a strong yen as traders await central bank meetings in Japan and the United States this week.

The Bank of Japan, which closes its meeting Friday, is thought to be preparing to widen its broad monetary easing programme, a prospect which sent the yen tumbling and the Nikkei index soaring this month.

However, the two reversed course Tuesday with a drop in oil prices also hitting confidence.

“The market expectation for the BoJ to move is very high,” Angus Nicholson, a strategist at IG Markets Ltd. in Melbourne, said on Bloomberg Radio.

“There’s a real risk we would see a sharp retracement if they disappoint.”

By the close Japanese stocks were down 1.4 percent — a third straight loss — with exporters hurt as the dollar fell to 104.15 yen from 105.82 yen.

However, the advances that have characterised most of July continued elsewhere.

Hong Kong closed 0.6 percent higher, boosted by a rally in casino firms after Macau operator Sands China posted a positive earnings report. The firm rallied six percent, while Galaxy Entertainment was up 6.5 percent.

Shanghai ended 1.1 percent up, Sydney added 0.1 percent, Seoul put on 0.8 percent and Singapore rose 0.1 percent in late trade. Taipei, Manila and Bangkok also chalked up gains, although Wellington edged down slightly.

Key figures at 0800 GMT Tokyo — Nikkei 225: Down 1.4 percent at 16,383.04 (close)

Hong Kong — Hang Seng: Up 0.6 percent at 22,129.73 (close)

Shanghai — Composite: Up 1.1 percent at 3,050.17 (close)

Oil

Oil pared losses on Tuesday to trade below $45 a barrel, after falling to its lowest since May on concerns that a long-awaited rebalancing of the market would be delayed due to excess supply.

Brent crude is up more than 60 percent from a 12-year low near $27 in January, but the rally has petered out on signs that the supply glut will persist and as economic jitters raised concern about the strength of oil demand.

Global benchmark Brent was trading at $44.70 a barrel at 1402 GMT, down 2 cents. It fell to $44.14 intraday, the lowest since May 10. US crude was down 18 cents at $42.95, having fallen to its lowest since April earlier.

“Right now, there is not much to be optimistic about,” said Olivier Jakob, oil analyst at Petromatrix, citing weak refining margins that will probably weigh on crude demand. “We have to wait a little bit longer for the rebalancing.”

Traders said a weak US dollar, a view that the earlier price drop was overdone and US gasoline were lending support. Gasoline briefly reversed losses after data from market intelligence firm Genscape pointed to an inventory drop.

Record crude output from the Organization of the Petroleum Exporting Countries, a glut of refined products and signs of more drilling activity in the United States in the face of low oil prices have added to concern about excess supply.

US drillers added oil rigs for a fourth consecutive week. The decline in US output has been key to balancing a market weighed down by excess supply for two years.

Gold

Gold rose on Tuesday as the dollar fell, but remained hemmed into a range ahead of a two-day Federal Reserve policy meeting this week, which will be closely watched for clues on the outlook for US interest rates.

The dollar slid a quarter of a percent against a currency basket, largely due to a bounce in the yen after traders dialled back expectations of how much new stimulus Japanese authorities will inject into an ailing economy.

Spot gold was up 0.4 percent at $1,320.46 an ounce at 1402 GMT, while US gold futures for August delivery were up $1.40 an ounce at $1,320.90.

The Fed is expected to leave policy unchanged at its meeting starting later in the day, but investors are watching for any signs that the US central bank may move back to tightening later this year, a move that would be negative for gold.

Gold is highly sensitive to rising US interest rates, which lift the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.

“The key thing for commodities in the past month is that the macro data in both the United States and China has definitely improved, and that is reflected in the probability of rate hikes,” Oxford Economics’ director of commodity services Daniel Smith said.

“We’re looking at a 50 percent probability of a rate hike by year-end.”