Global stocks, oil, yields slip as investors start week in cautious mood

[May 23, 2016]  By Jamie McGeever

LONDON (Reuters) - Stocks, oil and yields on government bonds all fell on Monday, reversing some of their recent gains as investors began the week in a cautious mood, still grappling with the possibility that U.S. interest rates could soon be raised.

The FTSEuroFirst 300 index of leading shares, Germany's DAX and France's CAC 40  all shed around 0.8 percent, and Britain's FTSE was down a third of a percent.

Shares in German drugs and chemicals group Bayer AG were among the most notable decliners, down more than 3 percent after it unveiled a $62 billion bid for U.S. seeds company Monsanto Co.

Investors also took in economic data that showed euro zone private sector growth in manufacturing and services slowing down a little in May, even though Germany continued to power ahead.

U.S. futures pointed to a fall of around 0.2 percent at the open on Wall Street, as investors continued to digest last week's surge in U.S. rate hike expectations.

"U.S. economic momentum is starting to gather pace in the second quarter. If this can be sustained, the Fed will need to start following through on its words," said Michael Stanes, Investment Director at Heartwood Investment Management.

"Indeed, a failure to act in the event that the Fed stays on hold longer than the underlying data would suggest is likely to increase the risk of a policy error," he said.

Purchasing managers index data showed that euro zone business growth slipped in May to a 16-month low, the latest evidence to suggest a strong acceleration in growth in the first three months of the year was only temporary.

Markit's flash Composite Purchasing Managers' Index, one of the first growth indicators in a month, edged down to 52.9 from April's 53.0, the lowest since the start of 2015.

Germany's private sector growth accelerated in May to the highest level so far this year, but activity elsewhere failed to keep pace.

Earlier in Asia shares mostly rose, with MSCI's broadest index of Asia-Pacific shares outside Japan up 0.3 percent, but Japan's Nikkei ended down 0.5 percent.

The Markit/Nikkei flash Japan manufacturing PMI showed Japanese manufacturing activity contracted at the fastest pace in more than three years in May, while a slump in Japanese trade and reports that Japan's sales tax increase would indeed be implemented all weighed on the Nikkei.

"In a climate dominated by speculation over monetary policy, PMIs give a solid insight into the state of the 'real' economy and how domestic industries are coping with policy measures, and are not to be ignored," said Ana Thaker, Market Economist at PhillipCapital UK.


OIL'S VERTIGO AT $50

Markets have started to entertain the prospect of a near term U.S. rate hike after last week's release of Fed meeting minutes showed that policymakers weren't shying away from raising interest rates as early as next month.

The probability for a June rate hike rose from around 4 percent at the start of the week to 30 percent on Friday, according to CME Group's FedWatch site. Futures markets are predicting two rate increases this year as opposed to just one as recently as last week.

Federal Reserve Chair Janet Yellen will appear at a panel event hosted by Harvard University on Friday. Fed branch presidents including those from San Francisco, St. Louis, Dallas, Minneapolis are also slated to speak earlier in the week.

But given the speed of these expectation shifts, investors took the opportunity for a pause on Monday, pushing bond yields lower across the board. [DATA/]

The 10-year U.S. Treasury yield fell 3 basis points to 1.82 percent, after having chalked up its biggest weekly rise last week for six months. The two-year yield fell a basis point, flattening the yield curve slightly.

Lower U.S. yields and a flatter curve kept a lid on the dollar. The dollar index, which tracks the greenback against a basket of six rival currencies, slipped marginally to 95.31. It has racked up three straight weekly gains, a run not seen since the first quarter of last year.

The yen gained most among the major currencies, supported by the ballooning Japanese trade surplus. The dollar was last down 0.7 percent at 109.37 yen , and the euro was steady at $1.1217.

Crude oil prices fell by about 1 percent, once again running out of steam as the $50 a barrel level came into view. It took three months for oil to make the convincing and lasting break below $50 on the way down last year, and it's shaping up to be a psychological barrier on the way back up.

Both U.S. and Brent crude  were hovering around $48 a barrel.

(Reporting by Jamie McGeever; Editing by Jeremy Gaunt and Hugh Lawson)

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