Stock rally peters out as markets question US rate cut impact

A view shows the Federal Reserve building in Washington August 22, 2012. – Reuters pic
A view shows the Federal Reserve building in Washington August 22, 2012. – Reuters pic

LONDON, July 19 — European stock markets slipped back today after an initial rally, as investors cooled on comments by a top Federal Reserve official that hinted at the US central bank unveiling a deep interest rate cut at the end of the month.

The dollar was higher, while oil prices jumped on escalating tensions between the United States and Iran.

John Williams, the influential vice chairman of the Fed’s policy-setting board, said central banks should move quickly to support the economy even when borrowing costs were already low.

He pointed to studies suggesting that when there are few stimulus options available, officials should “move more quickly than you otherwise might,” rather than waiting “for disaster to unfold”.

While a spokesman later clarified that Williams was not outlining Fed policy and was not flagging a half-point cut, analysts said the remarks provided an insight into how officials were thinking.

Markets have been wavering this week over how big the Fed’s expected reduction would be, with 25 basis points priced in but some traders hoping for 50.

Wall Street ended in positive territory yesterday following Williams’ comments, with Asia and Europe picking up the baton with solid gains Friday before profit-taking set in amid lingering concerns about the global growth outlook and a lack of progress in China-US trade talks.

Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co, cautioned about becoming too excited by the prospect of a sharp US rate cut doing much to support the economy.

“I don’t think a few rates cuts are going to make the difference, whether it’s 25 or 50 basis points at the end of this month,” he told Bloomberg TV. 

Oil rallies

Elsewhere today, oil jumped more than 1.5 per cent after US President Donald Trump said an American navy vessel downed an Iranian drone in the strategic Strait of Hormuz, a claimed strongly denied by Tehran.

The alleged incident yesterday comes amid soaring tensions between the two foes after Iran shot down a US drone last month.

Markets are concerned about escalating tensions in the Gulf through which nearly a third of the world’s oil is transported.

“With the situation... turning into a powder keg again, Brent crude prices will remain propped up,” noted Fiona Cincotta, an analyst at City Index trading group.

On the corporate front, the world’s leading brewer AB InBev said it plans to sell Australian unit Carlton & United Breweries for 16 billion Australian dollars (US$11.3 billion).

AB InBev, a Belgian-Brazilian behemoth that owns brands such as Stella Artois and Budweiser, is saddled with more than US$100 billion in debt. 

Key figures around 1015 GMT

London — FTSE 100: FLAT at 7,493.96 points

 

Frankfurt — DAX 30: UP 0.1 per cent at 12,235.82

Paris — CAC 40: DOWN 0.1 per cent at 5,546.42

EURO STOXX 50: DOWN 0.1 per cent at 3,479.10

Tokyo — Nikkei 225: UP 2.0 per cent at 21,466.99 (close)

Hong Kong — Hang Seng: UP 1.1 per cent at 28,765.40 (close)

Shanghai — Composite: UP 0.8 per cent at 2,924.20 (close)

New York — Dow: FLAT at 27,222.97 (close)

Euro/dollar: DOWN at US$1.1240 from US$1.1277 at 2050 GMT

Pound/dollar: DOWN at US$1.2533 from US$1.2548

Dollar/yen: UP at 107.63 yen from 107.30 yen

Brent North Sea crude: UP 1.8 per cent at US$63.06 per barrel

West Texas Intermediate: UP 1.6 per cent at US$56.16 per barrel — AFP