Investors shun stocks, seek safety in bonds as economic gloom spreads

[January 23, 2019]  By Josephine Mason

LONDON (Reuters) - Renewed concerns about a global economic slowdown continued to sap investor appetite for assets considered risky, dragging global stocks and bond yields lower on Wednesday, while the U.S. dollar held near three-week highs.

Trading was choppy overnight as hopes of more stimulus measures from China to shore up economic growth clashed with worries over progress between Washington and Beijing to resolve a trade spat between the world's top two economies.

MSCI world equity index, which tracks shares in 47 countries, was down 0.1 percent.

"The main culprit for the risk-off tone this morning is the change in sentiment around U.S.-China trade talks .... That seeped into Asia overnight and Europe this morning," said Edward Park, deputy chief investment officer at Brooks MacDonald.

The mood soured overnight after a report in the Financial Times that the Trump administration had rejected an offer from China for preparatory trade talks this week ahead of high-level negotiations scheduled for next week.

White House economic adviser Larry Kudlow denied the report, helping U.S. equities pare some losses though the fresh concerns about U.S.-China relations kept share prices in check.

The report dented hopes for a thawing in U.S.-China trade tensions that have fueled a rally in stocks through much of January, also supported by a more dovish-sounding Federal Reserve.

A fresh batch of disappointing corporate updates from European companies further knocked confidence about fourth-quarter earnings, pushing European stocks lower for a third session.

The pan European index was down 0.5 percent, with bourses all across Europe losing ground as a profit warning by Ingenico sent the French payment group down over 12 percent and hit the whole European tech sector.

MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.2 percent, stalling after climbing to a seven-week high on Monday.

Australian stocks lost 0.3 percent and Japan's Nikkei shed 0.1 percent.

U.S. futures pointed to a positive start for Wall Street. The S&P 500, the Nasdaq and the Dow all posted their biggest one-day percentage drops since Jan. 3 on Tuesday.

In another sign of risk aversion, most euro-zone bond yields fell after the Bank of Japan set the tone for further easing by warning of rising risks to its economy ahead of Thursday's European Central Bank meeting.

Markets expect the bank to acknowledge growing threats to the euro-zone economy.

A man looks at a stock quotation board outside a brokerage in Tokyo, Japan, April 18, 2016. REUTERS/Toru Hanai

ROUGH YEAR AHEAD

Justin Onuekwusi, a fund manager at Legal & General said central banks' stimulus unwinding, China's slowdown, the broader impact of trade wars and populist rhetoric from politicians were all keeping markets on edge.

"All these issues have an impact on markets. Every time you have an increase in rhetoric, markets react. It feels like there is a greater political risk premium."

"The biggest near-term risk is that as you see markets fall, confidence drops and you get people not spending which becomes self-perpetuating. The near-term probability of that has increased."

Recent data all pointed to a rough year ahead for the world economy.

U.S. home sales tumbled 6.4 percent in December, falling short of the weakest forecast, to their lowest in three years. Compared with a year earlier, they were down more than 10 percent for the first time since 2011.

House price increases slowed sharply, adding to evidence of a further loss of momentum in the housing market.

Canadian factory sales and wholesale trade both slumped more than expected in November, while in Germany a survey by the ZEW research institute showed morale among German investors improved slightly in January, but their assessment of the economy's current condition deteriorated to a four-year low.

Japan's exports and imports also fell short of market expectations, with exports posting their biggest fall in more than two years.

The U.S. dollar held near a three-week high after the Bank of Japan left monetary policy unchanged as expected, boosting risk appetite and sending the yen lower.

Against a basket of other currencies, the dollar was trading at 96.32, near the 96.484 hit in the previous session.

The euro was a shade lower at $1.1358 but remained in close reach of a three-week low of $1.1336 set on Tuesday, weighed by recent weakness in the euro zone economy and worries about fallout from Brexit.

In commodities, U.S. West Texas Intermediate (WTI) crude futures was up slightly $53.01 per barrel after shedding 1.9 percent the previous day.

(Additional reporting by Sujata Rao in LONDON and Hideyuki Sano and Shinichi Saoshiro in TOKYO; Editing by Jacqueline Wong and Elaine Hardcastle)

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