July 9, 2019 / 12:31 PM / 9 days ago

GLOBAL MARKETS-Stocks drop for third day, BASF warning stings Europe

(Updates with European market moves)

* Stocks drop for 3rd day as hopes for large Fed cut fade

* BASF shares fall almost 6% after profit warning

* Deutsche Bank shares continue to tumble

* Apple slumps on downgrade; suppliers in Asia, Europe fall

* Dollar firm as markets look to Fed chair's testimony

* Asian stock markets: tmsnrt.rs/2zpUAr4

* World FX rates in 2019 tmsnrt.rs/2egbfVh

By Marc Jones

LONDON, July 9 (Reuters) - World stocks fell for a third straight day on Tuesday after a stinging warning from German chemicals giant BASF about the effects of the global trade war and as hopes dwindled of a hefty U.S. interest rate cut this month.

With global macroeconomic clouds looming and markets waiting for policy signals from U.S. Federal Reserve chief Jerome Powell on Wednesday, the focus of headlines and sentiment turned to three individual heavyweight stocks.

For Europe, it was an almost 7% early slump in German chemicals giant BASF after it had blamed a global slowdown and trade war between the United States and China for what one trader described as a "shocking" 30% profit warning.

Deutsche Bank tumbled another 4% too - having already dropped 5.4% the previous day after it axed 18,000 staff - while Apple's overnight drop of more than 2% on Wall Street after a broker downgrade dragged both global tech sectors lower.

"Both from a bottom-up and top-down perspective, equity market valuations appear far too ambitious," analysts at Morgan Stanley wrote in a note.

It was particularly stark, they said, as the U.S. business cycle was in a downturn and both forward-looking indicators such as global PMIs and global trade are now in contraction territory.

"Indeed, companies have begun cutting their 2019 profit forecasts, citing the trade conflict as a reason," MS added.

In the currency markets, Britain's pound was threatening to slip to a more than 2-year low against the dollar and a 6-month trough versus the euro amid a worsening UK economic outlook and rising fears about a no-deal Brexit.

With the key $1.25 level against the dollar giving way in early Asian trade, traders quickly pushed the British currency down half a percent and it barely budged, even as opposition Labour Party leader Jeremy Corbyn inched closer to backing a second Brexit referendum.

The broader theme though remained the potential reaction to the weaker global outlook from the world's top central banks, especially on what Fed chairman Powell will say during a testimony and grilling from Congress on Wednesday.

Money market futures are still fully pricing in a 25 basis point (bps) cut at the Fed's July 30-31 meeting, but have almost priced out a larger 50 bps move that had been seen as a real possibility just a couple of weeks ago.

Benchmark government bond yields were clawing away from their recent lows and the dollar changed hands at 108.81 yen to build on the more than month high it had set in the previous session.

The dollar index versus a basket of six major currencies was also higher at 97.550, while the euro drooped back under $1.12 for the first since mid June.

"It would be pretty disruptive at this stage for Powell to rule out a cut in July or dampen expectations of a cut in July," said Michael Metcalfe, head of global macro strategy at State Street Global Markets.

"The last few Fed speakers, albeit non-voting speakers, have suggested July is not a done deal ... and even now, if you look at economists' forecasts, there is not a consensus that there will be a move, and yet the market is 100% priced."

TRADE STRAINS

Wall Street looked set to follow Europe and Asia lower with futures markets indicating falls of around 0.5% for the main S&P 500, Dow Jones and Nasdaq bourses.

The United States and China are set to relaunch trade talks this week after a two-month hiatus, but a year after their trade war began there is little sign their differences have narrowed.

Overnight in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.45% but pared earlier losses, having traded at its lowest level since June 19.

Chinese blue-chips ended down 0.25%, while Hong Kong's Hang Seng fell 0.75%. Japan's Nikkei put up the only resistance as gains in a few heavyweights in the index helped it edge up 0.15%.

Apple's suppliers, such as Murata Manufacturing and Taiyo Yuden, fell 2% and 4%, however, after Rosenblatt Securities cited a "fundamental deterioration" for the U.S. gadget giant over the next 6-12 months.

In Greater China, suppliers from Hon Hai to AAC Tech also lost between 1.4% and 3.1% and in Europe Infineon, ASM and STMicroelectronics slipped about 2%.

Among commodities, oil prices firmed after a dip in Asia as as OPEC supply cuts and Middle East tensions outweighed the U.S.-China trade dispute that has been dragging down the global economy and oil demand.

OPEC and its allies agreed last week to extend their supply-cutting deal until March 2020. Brent has risen almost 20% in 2019 supported by the pact and also tensions in the Middle East, especially concerns about the row over Iran's nuclear programme.

Benchmark Brent crude rose 59 cents to $64.70 a barrel and U.S. West Texas Intermediate crude CLc1 was up 46 cents to $58.12.

"OPEC and its allies are doing their best to support the market," said Tamas Varga, an analyst with PVM. "Oil prices are to hold up reasonably well during coming months or at least they are not to fall out of bed."

Gold prices ticked lower though as the dollar scaled its multi-week highs. Spot gold was down 0.2% at $1,393.03 per ounce and U.S. gold futures fell 0.3% to $1,395.70 an ounce.

Additional reporting by Bozorgmehr Sharafedin and Alex Lawler; Editing by Andrew Cawthorne and Alison Williams

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