China, Europe drag world stocks lower; dollar slips

[May 19, 2014] By Natsuko Waki

LONDON (Reuters) — Europe and Asia dragged world equity markets lower on Monday as concerns about slower growth in China prompted investors to cut their risks.

The dollar slipped against major currencies after expectations for continued monetary support from the Federal Reserve kept the benchmark 10-year yield near last month's six-month low.

Shanghai shares hit a three-week low as Beijing unveiled new regulations that tighten its grip on interbank lending to defuse risks among "shadow" non-bank financial firms that act like banks. Fresh data also added to evidence of a cooling property market.

"Markets think any weakness (in the Chinese economy) from here will be met with policy response from the authorities," said Manik Narain, strategist at UBS. "But there is room for China to disappoint so far. Weakness has been limited."

The benchmark MSCI world equity index <.MIWD00000PUS> fell 0.1 percent while European shares <.FTEU3> lost 0.4 percent.

Emerging stocks <.MSCIEF> outperformed their developed counterpart by rising 0.3 percent, approaching last week's 6-1/2 month high.

The dollar fell 0.1 percent <.DXY> against a basket of major currencies while the euro ticked higher.
 

NO STRAIGHT LINE

European shares were dragged lower by British pharma group AstraZeneca <AZN.L>, which fell more than 13 percent after it rejected a sweetened "final" offer from Pfizer <PFE.N>.

Deutsche Bank <DBKGn.DE> fell more than 2 percent after the lender unveiled plans to raise 8 billion euros ($11 billion) in new capital, in its third capital increase since 2010.

Deutsche's cap hike gives it the firepower for the investment banking push, especially in the United States, after a retreat by competitors Barclays <BARC.L>, UBS <UBSN.VX> and others left a gap that it aims to fill.

But it also underscores how the bank fell short of its ambitious turnaround targets and how burdensome fines and settlements and lagging profitability have hampered management's efforts to fortify capital by retaining earnings.

European shares have been rallying in recent weeks on expectations that the European Central Bank would cut interest rates to support the economy.

"It's not going to be a straight-line recovery and people will lose confidence in it at times," Richard Marwood, senior investment manager at AXA Investment Management, said.

"But you've got a safety net (from central banks) and I still think the stocks market is a better place to be than the bond market."

The 10-year Irish government bond yield fell towards last week's record low after Moody's upgraded Ireland's credit rating by two notches to Baa1.

"Ireland has come from being one of the weakest countries in the euro zone...but now in an upwards rating cycle, Ireland should do better than its current peers," said Peter Schaffrik, head of European rates strategy at RBC.

German Bund futures rose 2 ticks.

U.S. crude oil fell 0.6 percent to 102.65 a barrel.

(Additional reporting by Sujata Rao, John Geddie and Francesco Canepa)

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