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Central banks in focus as oil slump, spiking bond yields dent risk appetite

[July 07, 2017] By Vikram Subhedar

LONDON (Reuters) - World stocks are poised to end the week at six-week lows in the face of oil weakness, a spike in bond yields and anticipation of tighter monetary policy, particularly in the United States.

U.S. monthly payrolls data is due on Friday and economists polled by Reuters expect U.S. employers to have added 179,000 jobs in June, above May's gain of 138,000.

Investors are focused on wage growth and whether spending by U.S. consumers will be strong enough to back the U.S. Federal Reserve's intention to further tighten policy.

Bets that the world's major central banks are moving closer to unwinding ultra-loose monetary policies have roiled markets and European Central Bank minutes released on Wednesday indicate its policymakers are open to further steps.

This sent German government bond yields to 18-month highs, lifted the euro <EUR=> and weighed on stocks.

"Bond yields rule," said strategists at Morgan Stanley, led by Hans Redeker.

Bond markets are having an increasing impact on FX and equity markets, the strategists said, drawing parallels with moves seen in 2013 during the so-called "taper tantrum," when Fed signals about withdrawing liquidity hit markets.

MSCI's gauge of global stocks <.MIWO00000PUS> was at its lowest since late May's record highs and down 0.6 percent for the week.

European shares <.STOXX> fell 0.3 percent led lower by financials.

Stock futures on Wall Street <ESc1> <SPc1> pointed to a steady open after a tech-led swoon pulled major U.S. benchmarks sharply lower overnight. [.N]

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Picture of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany, July 6, 2017. REUTERS/Staff/Remote

The dollar rose against a basket of major currencies <.DXY> and hit a seven-week high against the yen after the Bank of Japan increased its government bond buying, expanding monetary policy when other central banks are moving towards tightening.

The BOJ said it would purchase an unlimited amount of bonds, as it sought to put a lid on domestic interest rates pushed higher by the broad sell-off in developed market bonds.

In commodity markets, Brent crude futures <LCOc1>, the international benchmark for oil prices, were trading down 1.2 percent, at $47.55 per barrel.

Oil prices are down more than 16 percent this year, muddying the outlook for inflation expectations globally.

Weakness in crude prices was drag on UK's bluechips <.FTSE> though a slide on sterling after disappointing economic data helped the exporter-heavy index outperform the region on the day.

Sterling slipped to the day's lows against the dollar, setting it up for its weakest weekly performance in a month, after industrial output data unexpectedly contracted in May, posing fresh challenges for the UK economy.

"Given the soft data this week, I think a U.K. rate hike is increasingly becoming a 2018 story," said Viraj Patel, an FX strategist at ING in London.

(Additional reporting by Saikat Chatterjee; Editing by Alexander Smith and Hugh Lawson)

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