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Stocks Slip as Investors Turn Cautious Ahead of Fed Meeting

By Tommy Wilkes

LONDON (Reuters) -Stocks gave up early gains on Monday as confidence that economies are recovering rapidly was overshadowed by caution over the speed of the market’s rally and ahead of a U.S. Federal Reserve policy meeting.

The start to the week was quiet as investors refrained from taking on large positions before a two-day Fed meeting that will begin on Tuesday and the impending release of quarterly gross domestic product numbers for the United States.

Investors have remained ebullient in recent weeks, with Wall Street hitting another intraday record high on Friday and European shares not far off their own record highs.

But there was some limited selling on Monday in Europe.

The Euro STOXX 600 was down 0.1% by 1050 GMT while Germany’s DAX lost 0.13%. Britain’s FTSE 100 was flat.

Wall Street futures pointed to a weaker open after Friday’s gains.

Asian shares rallied, however. MSCI’s broadest index of Asia-Pacific shares outside Japan reached its highest since March 12, despite a late selloff in Chinese shares.

That helped offset the falls in Europe and lift the MSCI world equity index, which tracks shares in 49 countries, by 0.16%.

Stocks — as well as most other risk assets — are basking in a massive rally. The MSCI world index has suffered only three down months in the past 12 and is up nearly 5% this month and 9% for the year as investors bet on a rapid post-pandemic economic rebound turbocharged by vast government and central bank stimulus.

Analysts, however, say stocks look a little overvalued and that the rally will run into hurdles after setting such a lightning pace and with so much of the economic recovery and fiscal stimulus splurge already priced in.

“The real crux of the issue, however, is what’s in the price. The year-to-date rally has increasingly eliminated upside to our targets,” noted Andrew Sheets, a strategist at Morgan Stanley.

“Across four major global equity markets (the U.S., Europe, Japan and emerging markets), only Japan is currently below our end-2021 strategy forecast.”

BOLSTER CONFIDENCE

Still, recent data pointing to a solid global economic recovery has bolstered confidence and limited any investor nervousness, as have strong corporate earnings and the continued rollout of COVID-19 vaccinations in developed economies.

Early April manufacturing activity indicators out last week pointed to a robust start to the second quarter with data hitting record highs in the United States and signalling an end to Europe’s double-dip recession.

First-quarter U.S. gross domestic product data due later in the week is likely to show activity probably returned to pre-pandemic levels, analysts said.

Most observers expect the Fed will stick to its pledge to keep stimulus flowing easily until the economy has recovered sufficiently and downplay the threat of rising inflation — any suggestion otherwise could knock confidence sharply.

“The equity market is happy that the Federal Reserve is likely to continue with no new guidance on eventual tightening of policy as it wants to react to outcomes rather than anticipating them and believes that any inflationary rise in coming months will prove transitory,” said Steen Jakobsen, Chief Investment Officer at Saxo Bank.

In currencies, the dollar — which had benefited from rising Treasury yields the past few months – fell against a basket of currencies to its weakest since March 3. Other major currencies were little changed.

Bitcoin snapped a five-day losing streak with an 8.5% jump. Cryptocurrencies fell on Friday on concern that U.S. President Joe Biden’s plan to raise capital gains taxes would curb investments in digital assets.

Those tax proposals, while raising hackles among some investors, caused only a temporary blip in stock markets’ march higher.

Government bond yields rose as investors dumped safer assets.

The U.S. 10-year Treasury yield rose 2 basis points to 1.5843% but that is some way off the plus-1.7% levels hit earlier this month when fears about a spike in inflation rattled markets. Euro zone government bond yields also ticked higher.

Turkey’s lira rebounded 1.3% following its recent slide but remains close to an all-time low as a chill settled on relations with the United States and after the new central bank chief signalled rate hikes would harm the economy.

In commodities, U.S. crude fell $1.01 to $61.13 per barrel and Brent eased $1.11 to $65.

Gold climbed 0.1% to $1,779 an ounce.

(Editing by Ed Osmond and Bernadette Baum)

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