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GLOBAL MARKETS-Trade talks buoy stocks, gloomy data sink euro

Piloto, Avion, Aviones

(Updates throughout, adds comment)

* Graphic: World FX rates in 2019

* MSCI ACWI flat

* Euro hits two-month low on poor PMIs

* STOXX 600 down 0.1%

* S&P 500 futures down 0.25%

By Ritvik Carvalho

LONDON, July 24 (Reuters) – Global shares held on to recent gains on Wednesday as the prospect of new China-U.S. trade talks drew a guarded welcome from investors, while dour data on euro zone economic activity hit the euro before a European Central Bank policy meeting.

Downbeat earnings as well as weaker-than-expected purchasing manager surveys in France, Germany, and the euro zone as a whole pushed European shares and the euro lower, with the single currency dropping to two-month lows.

MSCI’S All-Country World index of stocks was flat on the day, keeping its half a percent gain from the previous day. Futures indicated a lower open on Wall Street.

Broad sentiment was buoyed by a Bloomberg report that U.S. Trade Representative Robert Lighthizer would travel to Shanghai next week for meetings with Chinese officials.

White House economic adviser Larry Kudlow on Tuesday called it a good sign and said he expected Beijing to start buying U.S. agriculture products soon.

Chinese blue chips climbed 0.8% and MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.1%.

«While the resumption of trade talks appears to mitigate any near-term deterioration in US-China tensions, prudent investors will not get carried away, seeing as a meaningful deal still seems a long way off,» said Han Tan, market analyst at FXTM.

Stocks are below all-time highs, buoyed by expectations of a wave of policy stimulus by global central banks and consequently a decline in bond yields.

The ECB is expected to at least nod to looser policy at its meeting on Thursday.

Futures remain 100% priced for a rate cut of 25 basis points from the Federal Reserve next week and imply an 18% chance of 50 basis points.

The prospect of widespread central bank largesse helped take the sting out of the International Monetary fund’s downgrade of its global growth forecasts.

«There are two conflicting catalysts for stock traders right now: on one hand, central banks around the world are about to embark on an easing initiative…,» said Konstantinos Anthis, head of research at ADSS.

«On the other though, the slowdown in growth on a global scale and various geopolitical factors keep weighing down on corporate profitability, asking questions on whether equities have peaked.»

EUROGLOOM The dollar got help from a deal ending a deadlock over the U.S. budget, with the index that measures it against a basket of other currencies up 0.05%.

The euro reached two-month lows at $1.1127, falling further after the weak PMIs. It also fell to a near-seven-month trough against the yen at 120.19, though it recovered from a two-year low versus the Swiss franc.

A recession in German manufacturing worsened in July and French business growth slowed unexpectedly, purchasing manager indexes showed . Euro zone business growth was weaker than expected in July as manufacturing contracted for a sixth month.

«The continued malaise in manufacturing amplifies the prospect that the ECB will act with force in the coming months and deliver an extensive stimulus package that includes more QE (quantitative easing), to keep this weakness from infecting the so-far resilient services sector,» said Marios Hadjikyriacos, an investment analyst at online broker XM.

Money markets are now pricing in around a 52% chance of a 10-basis-point rate cut by the ECB at its Thursday meeting. A 10-bps cut is fully priced in for September’s meeting.

Sterling gained after two days of losses to touch three-week highs versus the euro, but options markets signalled pain ahead, foreseeing a greater risk of a no-deal Brexit under Britain’s new prime minister, Boris Johnson, as economic stress worsens.

Gold gained 0.68% to $1,426.60 per ounce, though it was still short of last week’s peak of $1,452.60.

Oil prices rose as tension grew over Iran, U.S. crude stockpiles fell and optimism for Sino-U.S. talks revived, although worries about weak demand kept a cap on gains.

U.S. crude futures rose 0.14% to $56.85 a barrel.

Reporting by Ritvik Carvalho; editing by John Stonestreet

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