European, Japanese shares hover close to record highs, China rate cut draws shrugs

FILE PHOTO: Screens showing the Hang Seng stock index and stock prices are seen outside Exchange Square, in Hong Kong, China, August 18, 2023. REUTERS/Tyrone Siu/File Photo

By Tom Westbrook and Alun John

LONDON/SINGAPORE (Reuters) -European shares teetered just shy of all-time highs on Tuesday, while euro zone wage data did little to jolt struggling government bonds, and Asian shares slipped as a record rate cut in China failed to excite investors.

Europe’s broad STOXX 600 benchmark was down 0.1%, but after its recent run up remains less than 1% from its record peak hit in early 2022, and S&P 500 futures dipped 0.3%. [.EU]

Similarly Japan’s Nikkei backed away from its flirtation with the index’s 1989 all time high, closing 0.3% lower. [.T]

The main data release for Tuesday on a fairly quiet calendar was ECB numbers that showed the annual growth in negotiated wages across the euro area slowed to 4.5% in the final quarter of 2023, down slightly from a record high of 4.7% in the third quarter.

The ECB has singled out wages as the single biggest risk to its 1-1/2 year crusade against inflation, in which it raised key interest rates to record highs.

It did little to move markets however, and Germany’s 10 year Bund yield, which moves inversely to its price, was down 2 basis points at 2.38% while the euro was a touch higher at $1.0798. [GVD/EUR]

The euro zone’s benchmark yield has risen around 35 bps so far this year as bumps in the road to lower inflation and better than feared economic data in most of the world, particularly the United States, has caused markets to push back their late-2023 expectations of significant rate cuts early this year.

Germany’s rate sensitive two year yield has risen 40 bps year to date.

“When you look at the bigger picture, we’ve put a tremendous amount of mileage behind us, the front end is much closer to fair value than at the beginning of the year, and closer to what the central banks tell us what they will do,” said Peter Schaffrik, chief European macro strategist at RBC Capital Markets.

Markets currently expect around 100 basis points of rate cuts from the Federal Reserve this year and only a touch more from European Central Bank.

But the generally better than expected economic data has been good news for shares.

“If you’re in an environment where the economy is stronger than you previously thought, and inflation is going to stay a bit sticky, and that means nominal earnings will stay decent,” said Schaffrik.

The highest profile earnings release of the week is stock market darling chipmaker Nvidia, which reports on Wednesday.

On Tuesday, British lender Barclays’ shares rose 4% after it laid out a three-year plan to revive its flagging share price, including axing 2 billion pounds of costs, with its fourth quarter earnings.

CHINESE RATE CUT

China’s five-year loan prime rate was lowered by 25 basis points to 3.95%, bigger than the five to 15 bp cuts forecast by economists. The one-year rate was left at 3.45%, helping blue chips to finish the day up 0.2%, after an earlier fall, and Hong Kong’s Hang Seng index to rise 0.6%. [.SS]

The Aussie dollar, a favourite proxy for China’s fortunes, barely moved and iron ore futures – sensitive to demand from Chinese construction – slid 3%. [AUD/][IRONORE/]

“This is the largest rate cut to the 5 year LPR that we have seen,” said David Chao, global market strategist at Invesco.

Leaving one-year rates on hold, however, sends the signal that Beijing is still being selective on the policy front and “has not fully pivoted to broad-based easing,” Chao said.

The yuan touched its lowest in three months in early trade before steadying at 7.1979 in the European morning.

Ten-year U.S. Treasury yields, up 10 basis points last week dropped 1 bp to 4.28%, on returning from a one day holiday. The dollar was strong enough to top 150 yen. [US/] [FRX/]

Commodities were steady with Brent crude futures down around 0.3% at $83.31 a barrel. Gold held at $2,022.7 an ounce. [O/R] [GOL/]

Soft commodities started the week on the back foot with wheat futures dropping to the weakest level in three months on pressure from abundant Black Sea supplies. Short-covering lifted soybean futures to one-week highs. [GRA/]

(Editing by Stephen Coates and Ros Russell)