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GLOBAL MARKETS-Investors cautious as central bank meetings loom

by on July 31, 2012 2:16 pm BST
 

Tue Jul 31, 2012 10:16am EDT

* Doubts rise over prospects for bold central bank action

* U.S. stocks mostly flat ahead of two-day Fed meeting

* Oil hovers near $106 a barrel after Chinese hint at growth
measures

* Euro edges higher versus dollar, awaiting ECB meeting

By Steven C. Johnson and Richard Hubbard

NEW YORK/LONDON, July 31 (Reuters) – U.S. stocks were mixed
on Tuesday while European shares snapped a three-day rally and
oil slipped on fear central banks may not deliver enough
stimulus this week to quell concerns about a global slowdown.

Equities and oil had been climbing steadily since European
Central Bank President Mario Draghi said he would do whatever it
took to save the euro. Markets interpreted that to mean the ECB
could announce at its Thursday meeting plans to lower Spanish
and Italian borrowing costs by buying those countries’ bonds.

Signs of flagging growth in the United States had also
raised hopes the Federal Reserve, which begins a two-day
rate-setting meeting on Tuesday, will step up bond purchases of
its own, though most economists expect it to hold fire until
September.

“The markets have run ahead of themselves. And I think
certainly the ECB and the Federal Reserve will hold back from
pumping in more money at this point in time,” said Manoj Ladwa,
head of trading at TJ Markets.

Neither central bank is expected to stay on the sidelines
for long, though, and that has helped pull the euro off recent
two-year lows and take U.S. stocks to their best year-to-date
rise since 2003.

The euro was last up 0.3 percent at $1.2296, while
U.S. government bonds also rose, with the benchmark 10-year U.S.
note up 7/32 in price to yield 1.48 percent.

But some traders said the ECB may not be able to live up to
market expectations, particularly if news from the debt-stricken
euro zone continues to get worse.

Capital flight from Spain gathered pace in May while the
central government’s deficit widened, raising fears that the
country may soon need a full-scale bailout.

“Everybody is waiting for Thursday to see if Draghi can
deliver,” said Lex van Dam, hedge fund manager at Hampstead
Capital, which manages $500 million of assets. “He’d better pull
a big rabbit out of his hat.”

The safe-haven German bond market reflected the growing
fears that whatever Draghi says at the bank’s policymaking
meeting is likely to disappoint markets.

European shares, which were heading for their best month
since October after soaring more than 5 percent in the last
three sessions, went into reverse, with the FTSE Eurofirst 300
index down 0.9 percent.

Investors in European shares were also given pause by
weaker-than-expected earnings from Deutsche Bank and
other major banks. The region’s ongoing debt crisis has hurt
revenues.

In U.S. markets, the Dow Jones industrial average was
down 15.82 points, or 0.12 percent, at 13,057.19. The Standard &
Poor’s 500 Index was down 0.93 points, or 0.07 percent,
at 1,384.37. The Nasdaq Composite Index was up 4.51
points, or 0.15 percent, at 2,950.35

MOMENTUM SLOWS

In the United States it’s been a slightly better story. With
294 of S&P 500 companies having reported earnings, 67 percent
have beaten analysts’ expectations, with another 10.9 percent in
line with forecasts and 22.1 percent below.

In a typical quarter 62 percent of companies beat estimates,
17 percent match and 20 percent miss estimates, according to
Thomson Reuters data.

But incoming economic data has painted a mixed picture at
best. A fourth straight monthly rise in U.S. single-family home
prices offered some encouragement Tuesday, though a fall in
inflation-adjusted spending in June underscored the economy’s
loss of momentum as the second quarter ended.

“Consumers are afraid,” said Matthew Lifson, analyst at
Cambridge Mercantile Group in Princeton, New Jersey. “This data
suggests the U.S. economy is stagnant overall and it’s just
muddling.”

That should keep future Fed action in focus, analysts said.

A separate report showed consumer confidence rose
unexpectedly this month.

SLOWDOWN FEARS

Commodity markets are increasingly concerned about the
health of the global economy as Europe’s sovereign debt crisis,
a slowing China and sluggish activity in the United States weigh
on demand.

Major Asian exporters Japan, South Korea and Taiwan added to
the deepening signs of economic stress on Tuesday.

But commodities and the growth-linked Australian dollar got
some support from an official Xinhua news agency report quoting
Chinese Premier Wen Jiabao as saying that China would increase
fiscal and monetary policy support to the economy in the second
half of the year.

Brent crude was down 99 cents at $105.21 a barrel,
while U.S. crude was down $1.10 at $88.68 a barrel.

Brent has had a strong July, rising 8 percent for its
biggest monthly gain since February.

Spot gold rose $1.15 to $1,621.60 an ounce in muted
trade ahead of the ECB meeting. Prices were on track for a 1.5
percent gain this month, its second straight monthly rise.