European stocks lack momentum as China boost fades

[June 27, 2023]  By Elizabeth Howcroft

LONDON (Reuters) -European shares struggled to maintain positive momentum on Tuesday, after Asian stocks got a boost from China's government saying it would support the economy, as investors focused on concerns about the economic outlook for Europe and the United States.

Asian shares were helped by Chinese Premier Li Qiang saying that Beijing will roll out policies to boost the world's second-largest economy.

But the positive market sentiment faltered in early European trading, with the pan-European STOXX 600 down 0.1%.

The MSCI World Equity Index was a touch higher, up 0.1% on the day at 668.72, having fallen since the 14-month high of 689.04 reached more than a week ago.

MSCI's Europe index was up 0.1%, London's FTSE 100 was up 0.1% and Germany's DAX was down by less than 0.1%.

Hani Redha, multi asset portfolio manager at PineBridge Investments, said the factors that had boosted European shares earlier in the year -- relief over the energy crisis easing and China's surprise post-COVID re-opening -- would not last.

"Now fundamentals are going to deteriorate because of the tightening of policy and because of the fading of these temporary tailwinds (which) leaves markets vulnerable," he said.

Wall Street saw losses on Monday as investors increasingly bet on the U.S. Federal Reserve keeping rates higher for longer.

The International Monetary Fund's second-in-command said on Monday that the world's top central banks may need longer to get inflation back down to target and a new bout of financial turbulence could make the process even more protracted.

European Central Bank President Christine Lagarde said that euro zone inflation could linger for some time, meaning the central bank is "unlikely" to be able to declare an end to rate hikes in the near future.

ABORTED MUTINY

Analysts said markets were generally unaffected on Tuesday by the aborted mutiny by Wagner Group mercenaries in Russia over the weekend, which appeared to reveal cracks in Russian President Vladimir Putin's grip on power.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, June 26, 2023. REUTERS/Staff

Oil prices dipped, as investors focused on U.S. data due later in the session which is expected to give indications of the U.S. appetite for fuel during the summer driving season.

Wheat futures, which had been lifted to a four-month high at the start of the week, declined after profit-taking.

"One other reason for the so far muted reaction to recent events is that we are coming to the end of the month as well as the first half of the year, with investors indulging in portfolio tweaking rather than any significant shift in asset allocation," said Michael Hewson, chief market analyst at CMC Markets, in a note to clients.

The U.S. dollar was a touch lower, down 0.1% against a basket of currencies ahead of data on durable goods, consumer confidence and new home sales, due later in the session. It hit a seven-month high against China's yuan, as investors braced for the possibility of China doing more to support the currency.

The euro was up 0.3% at $1.09365. The German yield curve was at its most inverted in nearly 31 years as investors bet that a flagging economy would lead the European Central Bank to cut interest rates after they reach their peak around 4%.

Euro zone government bond yields were up, with the benchmark German 10-year yield at 2.332%.

The British pound was up 0.1% on the day at $1.2718.

The Japanese yen fell to its weakest since November versus the U.S. dollar, after Japanese Finance Minister Shunichi Suzuki said sharp and one-sided moves were observed in the currency market.

(Reporting by Elizabeth Howcroft, editing by Ed Osmond)

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