* U.S. retail sales strong, but market still set on Fed cut
* Dollar gains, sterling stricken by hard-Brexit fears
* World shares just off 10-day highs, Europe flat (Updates, adds charts)
By Sujata Rao
LONDON, July 17 (Reuters) - Resurgent trade tensions, concern over the outlook for corporate America and the growing risk of a chaotic Brexit in the United Kingdom curtailed appetite for equities on Wednesday and stoked demand for “safe” government bonds.
U.S. President Donald Trump renewed his threat to tax another $325 billion of Chinese goods, amid nervousness over when the two sides will resume trade talks. But the United States could also face Chinese sanctions, following a World Trade Organization ruling on Tuesday. [nL8N24H53U
After surging to record highs recently on Federal Reserve rate-cut signals, Wall Street has grown nervous this week as big banks reporting quarterly earnings — Citi, JPMorgan and Wells Fargo — have recorded drops in net interest margins, a sign low interest rates are squeezing bottom lines.
Bank of America, Bank of New York Mellon, Netflix, IBM and eBay are among the companies reporting results later in the day and investors will watch for signals on the profit outlook.
“The market is over-extended. The anticipation is for a lot of liquidity injections and rate cuts and there’s little room in the market for disappointment in corporate earnings,” said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners.
“If there is disappointment in earnings-per-share, that will drive more consolidation in the market,” he predicted.
The fear is central banks may find it hard to rescue a world economy under pressure from the year-long trade conflict — the latest sign of which came from Singapore, whose exports sank by the most in six years in June.
Equity futures for the S&P500, Dow Jones and Nasdaq suggest Wall Street will open up 0.15% to 0.25%, while MSCI’s global equity index held just off recent 10-day highs. . A pan-European benchmark weakened for the fourth straight day.
A Fed rate-cut cycle would put further pressure on U.S. bank margins. Money markets are are 100% priced in for three rate cuts of 25 basis points each by next March. Some banks, such as Barclays, predict three cuts by the end of the year.
Those wagers have not budged even after a surprisingly strong U.S. retail sales report on Tuesday, robust June jobs data and the biggest rise in New York manufacturing in over two years. In fact, Chicago Fed President Charles Evans touted a 50-basis-point cut this month.
But those expecting three rate cuts this year could be disappointed, Savary said, because that magnitude of easing would be “compatible with a recession.”
Michelle Girard, chief U.S. economist at NatWest Markets, said domestic data would not deter the Fed.
“The Fed knows the U.S. consumer is strong; policymakers are worried about the downside risks associated with global growth and weak manufacturing/business investment, which is why they believe a rate cut is appropriate.”
Along with the trade uncertainty and soft equity markets, that kept bonds well-bid — U.S. Treasury yields, which rose after the retail data, inched lower again and German bonds also saw a fall in yields. .
Fed expectations have not weakened the dollar much. It stood around a one-week high against a basket of currencies after the previous day’s half-percent jump.
The dollar tends to benefit from trade war jitters, but it’s backed by higher interest rates than most other major currencies. It is also getting a boost from sterling, which is at 27-month lows on fears Britain will tumble out of the European Union with no trade agreement to soften the blow.
The pound fell further below $1.24, bringing losses this month to almost 2.4%. It has fallen 8% from its March peak of $1.3383.
The euro remains under pressure, after losing 0.4% on Tuesday. Weak business sentiment data heightened expectations the European Central Bank would cut rates twice this year from their current minus 0.4% level.
Gold fell 0.2% to $1,403 per ounce. Oil prices stabilised after falling more than 3% earlier. .
Additional reporting by Tom Arnold in London and Wayne Cole in Sydney, editing by Larry King