Stocks Struggle to Find Traction

By Riva Gold and Kenan Machado Features Dow Jones Newswires

Global stocks found little traction Friday, while the British pound inched up on the first anniversary of the U.K.'s vote to leave the European Union.

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The Dow Jones Industrial Average slipped 38 points, or 0.2%, to 21360 shortly after the opening bell. The S&P 500 fell less than 0.1%, while the Nasdaq Composite declined 0.1%.

Among the notable decliners, shares of Bed Bath & Beyond fell 11% after its earnings missed expectations.

Bank shares were a touch higher after the Federal Reserve said the largest banks survived a hypothetical "stress test," suggesting some could win the Fed's approval to increase dividend payouts to investors next week.

The Stoxx Europe 600 slipped 0.4% amid losses in autos and food and beverage companies, while London's export-heavy FTSE 100 declined 0.4% as the pound climbed 0.4% to $1.2728, paring the week's declines.

Since the June 23 U.K. referendum in 2016, the FTSE 100 index, which generates roughly two-thirds of its revenue overseas, has climbed about 17%, while the pound has fallen roughly 15%. The pound now looks cheap compared with historical levels, but U.K. interest-rate expectations have fallen significantly since the vote, with growth expected to slow this year, keeping the currency under pressure.

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"We don't see a recession on the horizon," said Ed Smith, strategist at Rathbones. "But the only thing that has really driven the U.K. economy higher over the last two years has been the consumer and household spending, and we think that's going to suffer," he said, noting the sharp fall in the pound has precipitated a rise in inflation that has outpaced real wage growth.

More domestically-oriented U.K. shares have underperformed the wider rally in the global equity market. Data from independent trade ideas network TIM Group suggests that while in June 2016, the long-short idea ratio for U.K. and other European shares was nearly identical, continental Europe has rebounded, while the outlook for U.K. stocks has remained daunting.

Shortly after the Brexit vote, "There was a fear it was opening the door to a more profound movement and the European project was under significant threat", said François Savary, chief investment officer at Geneva's Prime Partners. Since then, French and Dutch elections have eased political fears around the continent, and the eurozone economy has continued to improve, supporting the region's stock markets.

The eurozone's economy slowed slightly in June, but still had its strongest quarter in more than six years, according to a survey of activity in the manufacturing and services sectors published Friday.

Elsewhere in markets, yields on 10-year Treasury notes were little changed at 2.150% from 2.153% Thursday, while the WSJ Dollar Index edged down 0.2%.

U.S. crude oil slipped 0.3% to $42.61 a barrel. Oil prices have been a drag on stock markets this week.

While a lower oil price should support consumers and oil-importing countries, it has put pressure on shares of energy companies and equipment makers. It has also added to investors' doubts about the outlook for higher inflation, with some analysts expecting to see traces of the oil price drop showing up in eurozone and Japanese inflation figures next week.

Investors poured into so called "deflation" assets this week and took money out of inflation bets, according to analysis of EPFR Global data by Bank of America Merrill Lynch. Real-estate funds posted their first inflows in 11 weeks, while utilities funds had their best week in 51 weeks as both tend to benefit from softened inflation expectations. Treasury inflation-protected securities, known as TIPS, suffered outflows. TIPS increase their payout to holders if inflation measures exceed certain thresholds.

Earlier, Shanghai stocks recovered to trade up 0.3% in a volatile session after increased regulatory scrutiny over the borrowings of China's most prolific overseas deal makers sent markets lower. The Shanghai Composite Index dropped as much as 0.9% following news that regulators had ordered banks to check their loans to major Chinese conglomerates.

The choppy moves could heighten apprehensions about volatility that bogged down Chinese markets for most of last year, just days after index compiler MSCI decided to include A-shares in its emerging markets indexes next year. A dominance of retail traders that move in and out of the world's second-biggest stock market has meant that trades often happen on rumor and sentiment.

Japan's Nikkei Stock Average rose 0.1% despite a preliminary survey showing that the nation's manufacturing activity slowed in June, as air-bag maker Takata surged Friday after steep falls earlier in the week.

In South Korea, shares climbed 0.4% after the country's president, Moon Jae-in, said he would lobby China to lift restrictions it imposed on his country's businesses following the installation in Korea of a U.S. missile defense system that Beijing opposes.

Australia's S&P ASX 200 added 0.2% as gains from mining and energy stocks were mostly offset by selling in banking stocks, after one of the country's states proposed a tax on liabilities that would piggyback on a recently launched federal levy on the country's biggest lenders.

--Shen Hong and Ryan Tracy contributed to this article.

Write to Riva Gold at riva.gold@wsj.com and Kenan Machado at kenan.machado@wsj.com

(END) Dow Jones Newswires

June 23, 2017 09:54 ET (13:54 GMT)