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Market rout takes a breather, after sell-off puts stocks on course for worst month since financial crisis

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LONDON — Europe attempted a rebound on Thursday after Wall Street’s worst day since 2011 and heavy losses in Asia put global stocks firmly on course for their worst month since the financial crisis.

It wasn’t a sunny picture by any means. Germany’s Dax hit a near two-year low and London’s FTSE and Paris’ CAC 40 both brushed 1-1/2 year lows early on, but a semblance of stability was emerging.

The pan-European STOXX 600 was almost back at level pegging having opened down almost 1 per cent and after Japan’s Nikkei had slumped 3.5 per cent overnight.

Currency dealers were also cautiously reversing out of Swiss franc and Japanese yen safety trades and Italian and Spanish bonds made ground as traders waited to see what message the European Central Bank delivers at its meeting later.

“The markets have been acting like classic flight-to-safety markets,” said London & Capital’s head of fixed income Sanjay Joshi, pointing to the slump in stocks and rally in safer bonds and currencies.

“The worst thing the ECB could do would be to come out with a hawkish statement considering the situation we have at the moment.”

Most economists expect ECB President Mario Draghi to say the bank will stick to plans to end stimulus this year. But it will be the signal he sends about market volatility and concerns around Italy, his homeland, that could be most crucial.

Heavyweight investors have become increasingly nervous about lofty stock prices, faster rate hikes in the United States and an ongoing Sino-U.S. trade war that threatens to hurt world growth.

Almost 60 per cent of the 2,767 stocks in MSCI’s global equity index are now in so-called ‘bear market’ territory — down 20 per cent or more from their most recent peaks.

More woes in Asia overnight had seen the global wipeout on the MSCI World since January near US$7 trillion. Pan Asia-Pacific shares skidded more than 2 per cent while Japan’s Nikkei tumbled as much as 4 per cent to a six-month low.

The one relief was that Chinese shares managed to close in the black having dropped as much as 2.5 per cent at one point , as fresh government support measures failed to ease worries about high leverage and the tariff war with the U.S.

“If you’re a company and you’re in charge of a capex budget there is so much uncertainty about the next few years in terms of a trade war, in terms of Brexit,” said Jim McCafferty, head of Equity Research, Asia ex-Japan at Nomura.

Talking Turkey

Europe’s stabilization was aided by results from Swiss bank UBS and engineering giant ABB which helped take the edge off jitters caused this week by a gloomy tariffs warning from U.S. digger behemoth Caterpillar.

The ECB was looming too. Weak eurozone economic data this week have added to angst over world growth, as has a surprise slump in U.S. home sales, which suggested rising mortgage rates were sapping demand for housing.

It wasn’t just the ECB that was being closely watched either. Turkey, which has been stabilizing in recent weeks having been at the center of emerging market troubles was also holding a central bank meeting.

The consensus is that having almost doubled its interest rates already this year to 24 per cent, it might be brave enough to hold still this month.

In foreign exchange markets, the euro clawed its way back up to $1.14, having breached a long standing bulwark of $1.1430.

Against a basket of currencies, the dollar eased from near a nine-week peak to 96.296 and for the first time in days it was barely budged against the safety first Japanese yen at 112.25 yen.

Sterling also inched off a seven-week trough to $1.2887 , having dropped 0.8 per cent overnight and oil prices began to gain having been dragged down by the concerns over global growth.

Brent crude was last at US$76 a barrel, while U.S. crude was at US$66.63. Gold was a tad weaker at US$1,236.76 an ounce.

“Expect spirited rallies,” said Robin Bieber, technical analyst at London brokerage PVM Oil.

© Thomson Reuters 2018

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