Picture: 123RF/BLUE BAY
Picture: 123RF/BLUE BAY

London — World shares slipped off 21-month highs on Wednesday as the prospect of a US interest rate cut was offset by reports that a China-US trade deal may be delayed, but a possible $50bn merger between Fiat Chrysler Automobiles (FCA) and PSA capped European losses.

Sentiment has also been dented by weak earnings from a swath of companies ranging from European banking giant Deutsche to tech titan Google, and by renewed uncertainty in Britain, which is set to hold a parliamentary election on December 12.

After falls of about 0.5% on Asian bourses, European shares opened softer, with a pan-European equity benchmark down 0.2%.

The market was supported by the automotive index which rose 0.7% after news that car makers were in talks for a merger that would create one of the world’s biggest companies. FCA and French PSA shares jumped 7%-8%

But broader sentiment was undermined after Reuters quoted a US official as saying an interim trade agreement between Washington and Beijing might not be completed in time for signing next month. That weighed heavily on trade-sensitive tech and commodity shares in Europe, and MSCI’s world equity index edged down after five successive sessions in the black.

Michael Hewson, chief market strategist at CMC Markets, said the deal news had not sharply lifted shares because regulatory hurdles remain, not least the French government’s stake in PSA. “We’ve seen a lot of companies exploring mergers and acquisitions and I struggle to understand why this deal in particular is any more probable than the one with Renault,” he said, said referring to Fiat’s failed attempt to acquire another French car maker.

Some caution has also crept in before the US Federal Reserve announcement at 6pm GMT. Fed funds rate futures price a 25-basis-point (bps) cut on Wednesday but markets are fixated on what message the central bank will send, and December rate cut expectations have ebbed in recent days.

“The Fed could be quite hawkish in terms of ‘this is it’ and send a message markets don’t really want to hear. They are pricing the Fed on a full-blown cutting path and that may not be what the fed wants to convey,” Hewson said, noting still-robust US growth and booming stock markets.

But futures signaled a weaker session for New York, after the S&P 500 hit a record high. It had been boosted by strong earnings from drug manufacturers Merck and Pfizer but closed lower after the trade deal report.

Snap election in Britain

Adding to that was a disappointing report from Google parent Alphabet which pushed the tech-heavy Nasdaq Composite 0.6% lower. On the European earnings front, Deutsche Bank fell more than 6% after reporting a loss for the second consecutive quarter.

Germany’s Volkswagen (VW) provided a reminder of slowing global demand, cutting its 2019 sales outlook. Its shares slipped 0.7%.

Investors have abandoned some of their safe-haven bets in recent weeks and piled into equities since US President Donald Trump outlined what he called the first phase of a trade deal with China and expectations grew the US Fed would cut rates by 0.25 percentage points again this month.

That has taken world stocks almost 3% higher this month while expectations of more US rate cuts after this month have faded, lifting US treasury yields to six-week highs while German yields are set for their biggest monthly rise since January 2018.

Two-year US bond yields are about 1.65%, rising off two-year lows of 1.368% in early-October, while 10-year yields stood at 1.833%, up 20bps this month.

But the rally has stalled amid the uncertain outlook for trade, economic growth and company profits while optimism over Britain averting a no-deal exit from the EU has been replaced by trepidation over the calling of a snap election.

If no party wins conclusively, the future of Brexit will be up in the air again, with options including Britain leaving the EU without an agreement with Brussels, or another referendum being held that could scupper the divorce.

Those developments have pulled sterling 1.2% lower against the dollar in the past week. On Wednesday it traded modestly firmer around $1.29 and against the euro it edged up to 86.3p.

The dollar was steady against other major currencies before the Fed meeting and an advance reading of third-quarter economic growth that could shed light on the rate outlook. Against the yen, the dollar was little moved at ¥108.86 just off a three-month high.

“If the market is going to price in the end of the current rate-cut cycle, the dollar/yen could climb above ¥110,” said Tohru Sasaki, head of Japan markets research at JPMorgan Chase Bank. “On the other hand, if the market is going to price in two more cuts after this month’s expected cut, the pair could fall to mid-¥107 level.”

Reuters