LDN - Business

Oil slide muddies inflation outlook, weighs on stocks

[June 23, 2017] By Vikram Subhedar

LONDON (Reuters) - World stocks struggled to hold onto earlier gains on Friday and were poised for a flat end to the week following another wobble in energy shares, while a tentative bounce in oil prices helped commodity-related currencies gain against the dollar.

Crude oil pulled away from this week's 10-month lows, although prices were still set for their worst first-half performance since 1997.

The slide in energy prices has worsened the outlook for inflation creating a headache for the world's major central banks looking to normalize rates after years of ultra-loose policy.

"(The) oil price is the 'poster child' for victory of deflation," analysts at Bank of America Merrill Lynch (BAML) said in a note of weekly investment flows.

Investors were beginning to shift allocations accordingly and moving out of assets typically in favor when prices are rising such as inflation-protected U.S. Treasury funds and bank loans.

Elsewhere inflows into equities slowed with some investors moving into laggard energy shares, BAML said.

European shares <.STOXX> fell 0.5 percent while MSCI's gauge of world stocks <.MIWD00000PUS> slipped 0.1 percent.

Oil prices edged up on Friday, recovering some of their steep losses made this week, but the outlook for the commodity remains cloudy as production cuts have failed to sufficiently reduce oversupply.

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Traders work in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany, June 22, 2017. REUTERS/Staff/Remote

In currency markets, Friday's bounce in oil helped commodity currencies such as the Canadian dollar.

The dollar weakened against a basket of major currencies and is now down more than 0.5 percent since this week's earlier highs as doubts about how quickly the Fed will be able to raise rates crept in.

The dollar peaked at a one-month high on Tuesday after the Federal Reserve hiked interest rates last week and left the door open for further monetary tightening later in the year. But it has been stuck in a tight range since, awaiting fresh catalysts.

"For the dollar we’re in a waiting game until September," said Trum. "In our view they’ll then hike interest rates but then start to talk about the inflation rate - if that doesn't start to go up then future hikes will become more difficult."

In Britain, on the one-year anniversary of last year's shock Brexit referendum in which Britons voted to leave the EU, sterling <GBP=D3> extended gains.

The pound rose 0.37 percent against the dollar following more comments from Bank of England policymakers calling for a rate hike.

(Additional reporting by Lisa Twaronite, Editing by Jeremy Gaunt and Toby Davis)

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