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Stocks flatline after sell-off as US borrowing costs hold below peaks

London

WORLD stocks inched off eight-week lows on Wednesday as US long-dated borrowing costs held below multi-year peaks, though market gains were checked by fears for global economic growth and the possibility of an Italy-European Union (EU) clash over budget spending.

The effects of the global bond sell-off that took US 10-year bond yields to seven-year highs this week were exacerbated by economic growth concerns stemming from trade conflicts and US$80-per-barrel oil, with the International Monetary Fund (IMF) cutting its world GDP forecasts for the first time in two years.

The IMF's estimates for the United States and China were both reduced, with the fund predicting the countries would feel the brunt of their trade war next year. It also slashed its expectations for emerging markets for 2019.

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MSCI's world equity index rose 0.14 per cent after four days in the red. However, while Japan's Nikkei and MSCI's Asia-Pacific index outside Japan rose 0.2-0.3 per cent, European shares slipped 0.2 per cent, undermined by more bellicose rhetoric from Italian politicians.

Milan-listed stocks traded 0.15 per cent higher however, rising off 18-month lows hit earlier in the week.

Wall Street was set to open flat to weaker, futures showed.

There are also concerns over China where the yuan slipped against the US dollar for the fifth session out of the past six to approach four-year lows hit in August.

The focus is on next week's semi-annual US report on currencies amid Treasury officials' comments that recent yuan depreciation has raised concerns in Washington.

However, some relief came from US Treasuries where 10-year borrowing costs kept well below a 7-1/2-year peak of 3.261 per cent.

"We are at some sort of critical moment, a crossroads, for bond and equity markets," said Marie Owens Thomsen, global head of economic research at Indosuez Wealth Management, noting that while US 10-year yields at 2 per cent unequivocally favoured equity investment, this was not so above 3 per cent.

"This January we took out the 2 per cent (yield) handle and now we are wondering if we are permanently taking out the 3 per cent handle as well. That makes the climate for equities much more challenging."

Buoyant US data

She cautioned though that signs of deceleration in world growth and IMF forecast cuts could curb the relentless rise in yields which was partly fuelled by buoyant US economic data.

The Treasury sell-off may have been curbed also after US President Donald Trump complained said the Federal Reserve was going too fast in raising rates. But they rose 1.3 basis points to 3.22 per cent on Wednesday, also getting some traction from Europe, where German yields inched up amid fresh concerns in Italy.

Italian bond yields pulled off multi-year highs on Tuesday after Economy Minister Giovanni Tria pledged action to restore calm should market turbulence escalate into financial crisis. Yields slipped further after Mr Tria said he expected "collaboration" with the EU on the budget issue.

But markets' pressure has not dissuaded the government from a bigger-than-expected budget deficit; ministers' comments appear to indicate they are prepared to defy EU critics.

The developments have raised risks of a credit ratings downgrade for the country, with a knock-on effect for Italian banks which are big holders of government bonds. However, the banks' shares received a boost after an EU official told Reuters regulators were "intensely" monitoring Italian banks' liquidity levels but there was no cause for alarm.

"I am not saying Italy is managing the situation in an ideal fashion but at the current junction I don't think they are anywhere near a position where they can provoke another crisis in Europe," Ms Owens Thomsen said.

Politics were also in focus in Britain where reports of progress between the UK and the EU in negotiating a Brexit deal pushed the pound to 3-1/2-month highs against the US dollar.

Analysts at Eurizon SLJ Capital said parliamentary approval looked likely for Prime Minister Theresa May's Brexit deal. The Times newspaper reported 30-40 opposition Labour MPs would back the agreement.

"Already significantly undervalued, sterling has upside risks, especially against the euro," Eurizon SLJ told clients, arguing that US$1.55 was "fair value" for the currency.

The US dollar was flat against a basket of currencies, easing from seven-week peaks after Treasury yields retreated. That allowed emerging currencies, hard hit in recent days, to make tentative gains. REUTERS