GLOBAL MARKETS-Stocks slide on rates outlook, soft retail

GLOBAL MARKETS-Stocks slide on rates outlook, soft retail
Thu May 10, 2007 9:45 AM ET

(Updates with Trichet news conference, Wall Street open)

By Lincoln Feast

LONDON, May 10 (Reuters) – Stocks and government bonds dipped on Thursday as the spectre of higher global interest rates dented sentiment following monetary policy decisions from central banks in the United States, Europe and Britain.

U.S. stock indexes opened lower after weaker-than-expected monthly sales reports from a number of U.S. retailers suggested consumer spending was slowing as the economy cooled.

The European Central Bank left interest rates steady at 3.75 percent, as expected, but President Jean-Claude Trichet said “strong vigilance” was needed to maintain price stability, a signal taken by markets to mean a hike would come next month.

“Bottom line is that they will hike in June and that 4 percent is not the peak. We keep seeing rates at 4.50 percent by year end,” Aurelio Maccario, an economist at Unicredit MIB, said of Trichet’s comments.

Earlier, the Bank of England raised interest rates to a six-year high of 5.5 percent, while the U.S. Federal Reserve left borrowing costs unchanged at 5.25 percent late on Wednesday but dampened the prospect of rapid rate cuts by highlighting ongoing inflation risks.

Data showing the U.S. trade deficit widened to an above-forecast $63.9 billion in March and a slight dip in weekly jobless claims helped government bonds recoup earlier losses.

STOCKS SLIP

Global stock indexes proved unable to push on to fresh record highs in the absence of any positive surprises on the interest rate outlook and as a widely speculated $100 billion-plus bid for mining giant Rio Tinto <RIO.L> from rival BHP Billiton <BLT.L> failed to materialise.

Rio shares fell 4 percent and BHP shares shed 3 percent.

MSCI’s All-Country World Index <.MIWD00000PUS> dipped 0.3 percent to 396.6 points, while Europe’s FTSEurofirst 300 <.FTEU3> was down 0.5 percent at 1,576.9 points by 1330 GMT.

The Dow Jones industrial average <.DJI> was down 0.4 percent at 13,307.2 points in early trade, while the Nasdaq Composite <.IXIC> also fell 0.4 percent, to 2,565.6 points.

Asian markets fared better, with China’s main index, the Shanghai Composite <.SSEC>, hitting a record high in hectic trade as bullish retail investors ignored growing concern among institutions that the market had climbed dangerously high.

Japan’s Nikkei average <.N225> ended little changed as a fall in shares in Toyota Motor Corp. <7203.T> after disappointing earnings offset gains in the real estate sector.

LOW YIELDING YEN STRUGGLES

Both the dollar and the euro made ground against the yen on expectations that the strong yield advantage enjoyed over the Japanese unit is likely to be maintained for the time being.

“Yen crosses have been hit. (The yen) is the whipping boy of weak currencies at the moment,” said Jeremy Stretch, strategist at Rabobank.

Interest rates in Japan are just 0.5 percent.

The dollar was 0.3 percent firmer at 120.40 yen <JPY=>, while the euro was up a quarter percent at 162.90 yen <EURJPY=>, within a yen of its lifetime peak set last week.

The euro was unchanged at $1.3530 <EUR=>, having hit a record high above $1.3680 in April.

Sterling <GBP=> ticked lower to $1.9890 despite the Bank of England raised UK borrowing rates to the highest in the Group of Seven nations and hinting that rates could yet go higher.

U.S. Treasuries and euro zone government bonds recouped most of their earlier losses after the U.S. trade data and comments from Trichet on moderating inflation.

Benchmark 10-year Treasuries <US10YT=RR> yielded 4.66 percent, while the June Bund future <FGBLM7> was down 1 tick at 113.68.

Buoyed by supply disruptions in Nigeria, oil prices more than recouped the previous session’s losses which followed data showing a huge build in U.S. crude inventories. London Brent crude <LCOc1> was up 87 cents at $66.06 a barrel.

Today was a very bad day at the market.  Many investors were either selling off their investments or shorting them to make the most of today’s news.  Friday doesn’t appear to bode well for the Asian markets since many indices are opening with sharp declines in light of mediocre performance in the US and EU.  Hopefully, these sharp declines will recover by the end of the year as many equities and funds suffered significant declines that nearly wiped out 2-3 months of gains.

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