World shares stuck, oil tumbles as China stimulus plan too vague for investors

By Dhara Ranasinghe and Alun John

LONDON (Reuters) -Stock markets held below last month's record highs on Monday, while the Chinese yuan and oil prices weakened as China's broad economic stimulus promises at the weekend failed to inspire investors across the globe.

U.S. stock index futures were mixed ahead of a week packed with third-quarter earnings that include the likes of Goldman Sachs, Morgan Stanley and Netflix.

Europe's broad stock index was little moved as investors bided time before a European Central Bank rate decision on Thursday.

Globally, the focus was firmly on China where the government on Saturday pledged to significantly increase debt, but left investors guessing on the overall size of the stimulus, a detail needed to gauge the longevity of a stock market rally.

"We didn’t get much over the weekend, but our expectations were not for much anyway, I still think more fiscal stimulus is coming, this year and in coming years," said Mohit Kumar, chief financial economist Europe at Jefferies.

"In the short term, say a 3 to 6 month horizon, it is a clear positive. But does it change my long term view? Probably not, there are a lot of structural issues, such as the overleveraged property sector."

While the CSI300 blue-chip index and the Shanghai Composite Index gained around 2% each, shares in Hong Kong closed around 0.8% softer.

Property stocks, onshore and offshore, posted solid gains as investors bet the latest stimulus measures could aid China's beleaguered property sector.

And the latest stimulus pledges prompted Goldman Sachs to raise its China real gross domestic product forecast for this year to 4.9% from 4.7%.

But in a sign of the mixed response from investors, China's offshore yuan fell 0.3% to 7.0902 per dollar.

In addition, oil prices wiped out nearly all the gains made last week after data showed China's inflation rate declined and a lack of clarity on the country's economic stimulus plans stoked fears about fuel demand in the world's biggest crude importer.

Brent crude futures fell $2 to $77.02 per barrel, while U.S. West Texas Intermediate crude futures also fell $2, or 2.7%, to $73.52 per barrel.

In Europe, LVMH, Hermes, Kering and other French luxury stocks exposed to China fell roughly between 2% and 4%.

LACKING MOMENTUM

All this left MSCI's World Stock Index flat on the day, below record highs hit last month.

French government bonds showed little immediate reaction to news that credit ratings agency Fitch had revised France's outlook to "negative" from "stable" on Friday, citing increases in fiscal policy and political risks.

"People are already negative on France, it's some positivity that they are making an effort (on the deficit)," said Kumar.

France's 10-year bond yield gap over benchmark Germany was around 77 basis points (bps), slightly tighter from Friday's closing levels.

Germany's 10-year bond yield was steady on the day at 2.27%.

Currency markets, like government bonds, were largely subdued.

The dollar drew support from reduced bets of a big Federal Reserve interest rate cut next month.

Against a basket of currencies, the greenback was a touch softer at 103.02, hovering near a recent seven-week high.

Traders have priced out any chance of a 50-basis-point rate cut from the Fed in November after data last week showed consumer prices rose slightly more than expected in September and recent economic releases have also underscored strength in the labour market.

Sterling dipped 0.1% to $1.3054, with some focus in UK markets on an investment summit as the new Labour government tries to boost the country's long-term economic outlook.

The euro eased just 0.08% to $1.0927 ahead of a likely ECB rate cut on Thursday.

Konstantin Veit, a portfolio manager at PIMCO, said he expected a quarter point rate cut to 3.25%.

Data signal a euro zone economy in worse shape than when policymakers last met, boosting bets on speedier rate cuts than the quarterly pace June and September reductions suggested.

"While the ECB has previously been guiding towards the next rate cut in December, a weaker macroeconomic picture has likely strengthened the Governing Council’s confidence enough to deviate from the quarterly rate cut trajectory and make its first move outside a staff projection meeting," Veit said.

(Reporting by Dhara Ranasinghe and Alun John in London and Rae Wee in Singapore; Editing by Christopher Cushing, Sharon Singleton and Emelia Sithole-Matarise)