China leads world stocks in attempt to scale Fed, trade war hurdles

A visitor is seen as market prices are reflected in a glass window at the Tokyo Stock Exchange (TSE) in Tokyo – REUTERS

London (Reuters): A Chinese equity bounce set a modestly positive tone for world stocks on Wednesday as bets that Beijing would expand stimulus to support its economy helped offset some of the worries about global trade tensions and $80-a-barrel oil.

World stocks were flat, not far off six-month highs, but sentiment remains in check with US benchmark bond yields close to seven-year peaks, and as investors weigh how much more policy tightening is in store from the US Federal Reserve.

European shares trod water, failing to extend gains seen in Asia where Shanghai-listed shares closed almost one% higher at eight-week highs. However, Wall Street looked set for a firmer session, with futures for all three New York indices up around 0.2%.

Chinese shares rose after global index provider MSCI said it could quadruple China’s weighting in global benchmarks, lending fresh impetus to a market already buoyed by expectations of state stimulus to offset the impact of US tariffs.

Beijing is not expected to follow the US Federal Reserve in raising interest rates this week.

A pan-European equity index failed to build on the previous session’s gains though it remains close to one-month highs. World shares too struggled to make headway with investors keeping close watch on bond yields in the United States and Germany.

In the latest hurdle for equity markets, ten-year borrowing costs in both countries have inched to multi-month highs, with the first interest rate rise by the European Central Bank now expected in September 2019, two months earlier than had been priced recently.

German bonds, where many investors have taken shelter due to uncertainty in Italian markets, could see yields rise as the Italian coalition government has signalled repeatedly in recent days that its budget statement due on Thursday will not set out a spending binge. Italian yields fell as much as 10 bps on the day.

US 10-year Treasury yields traded around 3.08%, having risen as high as 3.113% on Tuesday, approaching a seven-year peak of 3.128% hit on May 18.

Fed funds rates futures implied traders are fully pricing in a US rate hike on Wednesday, plus an 85% chance of another rise in December. That expectation was cemented after data showed US consumer confidence hit an 18-year high.

The Fed’s past policy statements have shown that policy makers see 2.9%, about 100 basis points above the current levels, as an appropriate level in the longer run.

The Fed could hit that level by the end of next year if, as expected, it hikes on Wednesday, again in December and then twice more in 2019.

The dollar rose against a basket of major currencies to around 94.3, inching off 2-1/2-month lows hit last week. The euro slipped to $1.1744, not far from a three-month high of $1.18155 touched on Monday, while the yen changed hands at 112.9 to the dollar, approaching six-month lows set in mid-July.

Oil prices eased off four-year highs above $82 hit on Tuesday but were still set for a fifth consecutive monthly quarter of gains, driven by a looming drop in Iranian exports in the last quarter of the year when global demand heats up.