By Karin Strohecker
LONDON (Reuters) - European stocks lingered on Monday, hamstrung by dialled-down expectations for a larger U.S. rate cut this month, while escalating tensions in the Middle East boosted oil prices and rising fears for a no-deal Brexit haunted the pound.
Energy stocks booked the largest gains in Europe after crude oil prices jumped around $1 per barrel, on concern that Iran's seizure of a British tanker last week may lead to disruptions in the Middle East. [O/R]
Meanwhile, investors were shunning real estate stocks (SX86P) that would benefit from lower interest rates and defensive sectors such as utilities (SX6P) and telecoms (SXKP) ahead of a big week for earnings.
"Sentiment about company earnings potential appears to be mixed at best, with some evidence that we might be seeing a bit of a pickup in economic data, after a slow first half of the year," said Michael Hewson at CMC Markets.
"The pickup in U.S. economic data last week, as well as contradictory commentary from Fed officials, appears to be muddying the waters for investors about the possible reaction function of the U.S. Federal Reserve at the end of this month and whether we can expect to see a 25 basis point or 50 basis point rate cut."
Global stocks rose towards the end of last week after dovish comments by New York Fed President John Williams (NYSE:WMB) boosted expectations the world's top central bank would lower rates by 50 basis points at its July 30-31 meeting.
They gave back those gains and Wall Street shares fell after the New York Fed walked back Williams' comments by saying his speech was not about upcoming policy action.
Hopes for a larger cut were curtailed even more after the Wall Street Journal reported the Fed was likely to cut rates by 25 bps this month, and may trim further in the future given global growth and trade uncertainties.
The dollar inched higher and U.S. Treasury yields held steady on the greater likelihood of a shallower rate cut. The dollar index (DXY) gained to 97.193 against a basket of six major currencies after rising 0.4% on Friday.
The euro (EUR=) was little changed at $1.1219 after shedding 0.5% on Friday. The dollar edged up 0.16% to 107.86 yen
"Market direction will be driven increasingly by macro economic data; central bank policy responses are in the prices already and earnings are unable to lift the equity markets so the dynamics will be economic data and the concerns about geo-political risks and trade," said Larry Hatheway, head of GAM Investment Solutions & Chief Economist in Zurich.
"The market will struggle to find direction until autumn and we may have another pullback in capital markets."
Trump last week by renewed a threat to impose tariffs on another $325 billion of Chinese goods, even as hopes grew that the two sides would soon resume face-to-face negotiations in a bid to end their year-long trade war.
Elsewhere in currencies, the pound fell nearly half a percent amid increasing bets on a no-deal Brexit before the Conservative Party chooses its new leader on Tuesday. The pound was last down 0.3% at $1.2463
Iran's Revolutionary Guards on Friday captured a British-flagged oil tanker in the Strait of Hormuz after Britain seized an Iranian vessel earlier this month, further raising tensions along a vital international route for oil shipments.
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