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GLOBAL MARKETS-Investors cautious, await central bank decisions

by on July 31, 2012 6:34 pm BST
 

Tue Jul 31, 2012 2:34pm EDT


* Doubts rise over prospects for bold central bank action

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

* Oil down even though Chinese hints at growth measures

* Euro hangs on to slight gains vs dollar

By Steven C. Johnson

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

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

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

Data showing a fourth straight month of higher U.S. home
prices and improved consumer confidence may make it easier for
the Fed to wait, traders said.

“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 pulled the euro off two-year lows
and underpinned U.S. stocks’ best year-to-date rise since 2003.

The euro was last up 0.3 percent at $1.2300, while
U.S. government bonds surrendered earlier gains. The benchmark
10-year Treasury note was down 2/32 to yield 1.51
percent while the 30-year bond was down 7/32 for a
yield of 2.59 percent.

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

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.”

Internal debate within the ECB could mean that bold action
is still weeks away.

“There is a clear danger that expectations might be too
high,” said Nick Parsons, head of market strategy at nabCapital
in London.

The safe-haven German bond market reflected those concerns
as the premium investors demand to hold Spanish or Italian
10-year bonds over German ones widened

FADING MOMENTUM

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. The FTSE Eurofirst 300 index
fell 0.9 percent.

Investors were unnerved by weaker-than-expected earnings
from Deutsche Bank and other major banks. The euro
zone’s ongoing debt crisis has hurt revenues.

The Dow Jones industrial average was down 36.63
points, or 0.28 percent, at 13,036.38. The Standard & Poor’s 500
Index was down 3.83 points, or 0.28 percent, at
1,381.47. The Nasdaq Composite Index was up 0.34 points,
or 0.01 percent, at 2,946.18..

With 303 of S&P 500 companies having reported quarterly
earnings, 66 percent have beaten analysts’ expectations. The
average over the past four quarters is 68 percent.

But disappointing results from large companies such as
handbag maker Coach Inc put some investors on edge.

“This, coupled with headlines from Europe that won’t go away
and fears that China is slowing down means you have managers who
would like to watch the action versus participate in the
action,” said Andrew Frankel, co-president of Stuart Frankel &
Co.

What’s more, data showing a fall in inflation-adjusted
consumer 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.”

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

CONCERN IN COMMODITY MARKETS

Commodity markets, too, are concerned about the health of
the global economy as Europe’s debt crisis and slowing growth in
China and the United States weigh on demand.

That has put stress on major Asian exporters, including
Japan, Taiwan and South Korea.

But commodities 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, which chalked up its biggest monthly gain in
July since February, was down $1.33 at $104.87 a barrel,
while U.S. crude was down $1.79 at $87.99 a barrel.

Spot gold fell $6.08 to $1,614.40 an ounce in muted
trade ahead of the ECB meeting. Prices were still on track for a
second straight monthly rise.