Growth fears hit global stocks, investors eye Fed, Draghi

Reuters
A new all time high is displayed on the German share price index DAX board at the stock exchange in Frankfurt
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A new all time high is displayed on the German share price index DAX board which is reflected in a DAX …

By Jamie McGeever

LONDON (Reuters) - World stocks fell on Wednesday as a decline in Chinese inflation and weaker European industrial data combined to suggest global growth may be slowing, eclipsing a positive start to the U.S. earnings season.

The mining company Alcoa Inc reported results after Wall Street closed that beat analysts' expectations, but that was not enough to help European equities recover after they fell the most in three months on Tuesday.

Major currencies and bond markets were steady before a speech by European Central Bank President Mario Draghi and the release of the U.S. Federal Reserve's minutes of its latest meeting.

"Growth continues to be a concern in the developed world," said Mark Burgess, chief investment officer at Threadneedle Investments in London. "I don't think the developed world can handle short, aggressive interest rate rises. The last thing anyone wants to do is stifle growth."

Overnight, China's consumer price index rose 2.3 percent in June from a year earlier, shy of the consensus forecast of 2.4 percent, and a sign economic activity may be cooling.

At midday in London, the FTSEuroFirst 300 index of leading European shares was down 0.3 percent at 1,359 points.Germany's DAX was down 0.1 percent at at 9,766 points and France's CAC 40 was down 0.2 percent at 4,333 points.

Britain's FTSE 100 was down 0.5 percent at 6,703 points, hit hard by the insurance sector. Admiral Group fell 6 percent after issuing a trading statement update, and Aviva was down 3.7 percent

Portuguese stocks lagged their European peers, falling 2.2 percent on concerns about the financial health of one of the country's largest financial groups, Espirito Santo Financial Group. ESFG is the main shareholder of Portugal's largest listed bank, Banco Espirito Santo.

The Group's shares were down 11 percent.

DRAGHI RETURNS TO LONDON

Portguese bonds also underperformed, with the 10-year yield spiking to a six-week high just shy of 3.9 percent, while Greek yields ticked up to a one-month high of 6.17 percent as the country prepared to issue a new three-year bond.

Major bond markets were stronger, however, before the Fed minutes and Draghi's appearance in London, where he delivered his famous speech almost exactly two years ago pledging to do "whatever it takes" to save the euro.

The benchmark 10-year Treasury yield was unchanged at 2.565 percent. The yield on Germany's Bund slipped to a fresh one-year low of 1.21 percent.

In currency markets, the euro was unchanged at $1.3607, while the dollar inched up against the yen to 101.66 yen.

The dollar has fallen back below a key long-term technical indicator against the yen this week. That's the 200-day moving average, which on Wednesday was 101.83 yen, suggesting it may not strengthen much - if at all - in the coming days and weeks.

Upbeat June U.S. employment data last week prompted some Wall Street economists to predict the Fed would raise interest rates earlier than previously thought. But yields have fallen since then, with investors cautious about the strength of the recovery.

Disappointing German economic data on Tuesday kept the benchmark Bund yield anchored, and later on Wednesday investors will look to Draghi for signs the ECB could ease policy further to support the euro zone economy.

"If the ECB embarks on a round of assets purchases, it could push peripheral yields down another notch as investors view these assets as being backstopped by the central bank," Rabobank said in a note to clients. 

In commodities trading, Brent oil fell 0.2 percent to $108.73 per barrel. It has lost 3.5 percent so far this month.

Gold was up 0.4 percent at $1,324.00 an ounce as markets waited for the Fed minutes.

(Reporting by Jamie McGeever, additional reporting by Sudip Kar-Gupta; Editing by Larry King; To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Fund Blog Hub click on http://blogs.reuters.com/hedgehub)

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