GLOBAL MARKETS-Shares ease ahead of Fed test, dollar hits 2-month high

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

By Ritvik Carvalho
LONDON, July 29 (Reuters) - Global shares eased on Monday
and the dollar hit a two-month high against a basket of
currencies as markets counted down to a likely cut in U.S.
interest rates this week, with much riding on whether the
Federal Reserve signals yet more are to come.
After initially opening lower, European shares moved into
positive territory with deal-making and a rally in defensive
sectors pushing up the pan-European STOXX 600 index .STOXX
.EU .
The dollar index - which measures the greenback against a
basket of peers - was higher by 0.1% and at its highest since
May 31.
A stronger-than-expected U.S. GDP report on Friday gave the
dollar wings, as it led some investors to doubt whether the Fed
will continue easing this year after its Wednesday meeting.
Interest rate futures are fully priced for a quarter-point
rate cut from the Fed on Wednesday, with only a small chance of
a half-point move FEDWATCH .
More important will be what the central bank flags for the
future, given the market implies 100 basis points of easing over
the next year or so.
MSCI's All Country World Index .MIWD00000PUS of stocks,
down by as much as 0.2% on the day, erased some losses to trade
0.05% lower.
"The week is off to a mixed start which isn't wholly
surprising given just how much investors have to follow in what
is typically a peaceful time of year," said Craig Erlam, senior
market analyst at OANDA.
"There's no summer lulls just yet, with the Fed about to
embark on an easing cycle, the BoE (Bank of England) offering
its first assessment since Boris Johnson became PM, a third of
S&P 500 and a quarter of Dow companies reporting second quarter
earnings, the US jobs report being released and trade talks
restarting between the US and China. As ever, this is almost
entirely spread over four days so today may be the calm before
the storm."
U.S. and Chinese trade negotiators meet in Shanghai this
week for their first in-person talks since a G20 truce last
month, but expectations are low for a breakthrough. Data on the weekend showed profits earned by China's
industrial firms contracted in June, fuelling concerns that the
trade war will drag on economic growth. "We remain cautiously optimistic that both sides can agree
on a narrow agreement that addresses important trade-related
issues, such as U.S. demands to increase exports," said analysts
at Barclays in a note.
"That said, we are sceptical about the prospects of a
broader agreement that includes the more challenging
security-related issues."
In Asia, MSCI's broadest index of Asia-Pacific shares
.MIAPJ0000PUS was half a percent lower. Japan's Nikkei .N225
dipped 0.2% and Shanghai blue chips .CSI300 0.1%.
In bonds, euro zone bond yields dipped as jittery investors
eyed more U.S.-China trade talks and waited for a likely U.S.
Federal Reserve interest rate cut, after the European Central
Bank's dovish signalling last week disappointed some.
The benchmark German 10-year Bund yield fell more than 1
basis point to -0.3910% DE10YT=RR , not far from the record low
of -0.422% touched last week.
Elsewhere in currencies, sterling fell to a fresh 27-month
low around $1.2325 GBP=D3 amid reports the government of Prime
Minister Boris Johnson was preparing the ground for a "no-deal"
Brexit. GBP/ The euro was 0.1% lower at $1.111. EUR=EBS
Spot gold was flat at $1,418.13 per ounce XAU= .
Oil prices fell as investors fretted over the outlook for
global economic growth, while weekend talks between Iran and
major powers ended on a generally positive note, suggesting an
easing of tensions in the Middle East. O/R
Brent crude LCOc1 futures eased 0.74% to $62.99, while
U.S. crude CLc1 lost 0.34% to $56.01 a barrel.