Investors slam brakes on stocks rally as trade, Fed worries dominate

London (Reuters): World stocks slipped on Monday, halting a four-day recovery rally as anxiety surrounding global trade conditions and rising US interest rates dampened risk appetite.

European shares managed to reverse losses in choppy trade as investors readied for US congressional midterm elections on Tuesday, while sterling briefly climbed on a newspaper report that a Brexit agreement was imminent.

US stock futures also crept into positive territory, indicating a stronger start for Wall Street with S&P 500 futures up 0.1% and NASDAQ futures up 0.2%. 

MSCI’s all-country world index stayed down 0.2% though as investors remained cautious.

Chinese blue-chips fell overnight after White House economic adviser Larry Kudlow denied Washington has drafted a trade agreement with Beijing.

But investors looked to signs of support from Chinese stimulus to withstand higher trade tariffs. President Xi Jinping promised to lower import tariffs and continue to broaden market access.

Emerging stocks tumbled 0.8%.

With the Federal Reserve meeting on Wednesday and Thursday, the prospect of even tighter US monetary policy after strong economic data is also on investors’ minds.

Markets are now pricing in a higher probability of a December rate hike with further tightening to 2.75-3.00% seen through 2019.

Investors were also cautious ahead of the US midterm elections.

Opinion polls show a strong chance the Democratic Party could win control of the House of Representatives after two years of wielding no practical political power in Washington, with Trump’s Republican Party likely to hold the Senate.

Sterling briefly jumped to a two-week high on hopes of a Brexit deal, before paring gains to trade up 0.3% at $1.3011.

A Sunday Times report that an all-UK customs deal will be written into the agreement governing Britain’s withdrawal from the European Union drove the pound to $1.3062, its highest since 22 Oct.

May’s office said the report was speculative, but that 95% of the withdrawal agreement was settled and negotiations were ongoing.

The dollar index that measures it against a basket of major currencies was little changed. The euro held flat at $1.1389.

Core euro zone bond yields fell as expectations of faster US rate hikes, doubts over Sino-US trade talks and the mid-term elections prompted more defensive positioning.

Oil prices fell as the re-imposition of US sanctions against Iran’s fuel exports was softened by waivers that will allow some countries to still import Iranian crude, at least temporarily.

US crude fell 0.3% and Brent was down 0.2%.

Overall the recent drop in share prices has not been reflected in falling earnings expectations, and some expect stocks to pick up again once key political risks are out the way.