Global Markets: Risk appetite flickers as ECB bets hold down euro

ALX Resources

02/09/2014 14:36

* Europe shares edge higher after gains in Japan, China 
    * Wall St slightly higher to flat at reopen after Labor Day 
break 
    * Dollar/yen hits seven-month high, euro at new one-year low 
    * U.S. ISM manufacturing eyed for more dollar cues 
    * Russia sanctions tensions bubble 
 
    By Marc Jones 
    LONDON, Sept 2 (Reuters) - Risk appetite flickered back to 
life in financial markets on Tuesday with the dollar and 
European and Japanese shares rising while safe-haven bonds, the 
yen and gold all took a step back. 
    The dollar rose to its highest since January against the yen 
and the euro slipped to a one-year low after another drop in 
euro zone producer prices heightened speculation about what the 
ECB will do when it meets on Thursday. 
    U.S. stock indexes were marginally higher or steady as 
markets reopened after the long Labor Day weekend, with 
investors awaiting a flurry of manufacturing data.  ECONG7  
    Investors in Asia had been subdued, having been robbed of 
their usual U.S. lead-in overnight, but the mood in Europe had 
seemed brighter until fresh talk of sanctions on Russia and more 
soft producer prices data triggered a pullback. 
    As U.S. trading neared, European stocks  .FTEU3   .FTSE  
 .FCHI  were left battling to stay in the black, with only the 
Dax  .GDAXI  in Germany holding onto any real gains. 
    Ukraine said 15 of its soldiers had been killed in the past 
24 hours in fighting with pro-Russian separatists backed by 
Russian troops, while Europe's next foreign policy chief said 
the bloc's leaders would decide on a package of new sanctions 
against Russia by Friday.  ID:nL5N0R31HO  
    "We need to respond in the strongest possible way," Italy's 
Frederica Mogherini told reporters following a presentation to 
EU lawmakers in the European Parliament. 
    Russian shares  .MCX  and the rouble  RUB=  were broadly 
stable, though, after three days of falls. For those watching 
the developments closely, however, the lull was likely to prove 
temporary ahead of crisis talks at a NATO meeting in Wales at 
the end of the week.     
    "It is never a straight line, so it is a bit of a breather 
and a pause (in Ukraine-Russia tensions), but I continue to be 
concerned by this situation," said Benoit Anne, an emerging 
markets strategist at Societe Generale. 
    "And we all wait for the ECB, of course, this week. That is 
a major consideration and that will probably send a bullish 
signal to risky assets." 
    Bond markets have been one of the big beneficiaries of 
expectations the ECB will loosen policy to revive the euro 
zone's flagging economy, and traders cashed in some of those 
gains before Thursday's meeting even as the euro  EUR=  
continued to edge south. 
    Comments by ECB President Mario Draghi late last month led 
to bets the central bank is preparing to pump more liquidity 
into the system, possibly via purchases of government or 
corporate bonds, a measure known as quantitative easing (QE), to 
boost the faltering euro zone economy and stave off the risk of 
deflation. 
    Sources from within the ECB told Reuters last week that new 
action at its meeting this Thursday was unlikely but not 
impossible, and the barrier to QE was still "very high". 
    Euro zone producer prices fell again last month, by 1.1 
percent from a year ago, due to lower energy prices, data showed 
on Tuesday. It was the steepest annual drop since April, and the 
report caused the euro to tumble as low $1.3109  EUR= , after 
starting the session around $1.3123  EUR= . 
    IHS Global Insight economist Howard Archer said the price 
data was "more worrying news on the inflation front for the 
ECB," although core inflation, which strips out volatile 
elements like energy, has not dropped since November.  
  <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
   Asset returns in 2014         http://link.reuters.com/gap87v 
   Europe bourses in 2014:       http://link.reuters.com/pap87v 
   Euro zone debt crisis         http://r.reuters.com/hyb65p 
   ECB rates, inflation and euro http://link.reuters.com/jer39v  
  ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
   
    JAPAN REFORMS 
    In Asian trading, Chinese stocks gained for a third day and 
Tokyo's Nikkei  .N225  rose 1.2 percent, its biggest jump in 
almost a month. A planned cabinet reshuffle by Japanese Prime 
Minister Shinzo Abe helped to fuel reform hopes. 
    The dollar was boosted by the flagging euro and by gains in 
Tokyo shares that reduced demand for the safe-haven yen. The 
U.S. currency rose to a seven-month high of 104.87 yen  JPY=  
and reached a 14-month high on the heavily traded  .DXY  index 
of currencies. 
    "This (the euro's trough) is not just about the ECB. Part of 
this is a dollar story - the dollar has outperformed a whole 
bunch (of developed world currencies)," said Jane Foley, a 
senior currency strategist at Rabobank in London. 
    Foley added that increased momentum around the idea that the 
ECB would loosen policy, and that the Bank of Japan would 
introduce another round of QE, was driving the dollar's gains, 
with a perception that it was "the best of the bunch". 
    Later on Tuesday, an Institute of Supply Management report 
on the U.S. manufacturing sector could provide further evidence 
of economic improvement and highlight the diverging paths 
between the U.S. and euro zone economies.  ECONUS  The U.S. 
Federal Reserve looks ready to phase out quantitative easing 
just as the ECB may consider introducing it. 
    Elsewhere, the Australian dollar showed little reaction to 
the Reserve Bank of Australia's widely expected decision to keep 
its cash rate at a record low 2.5 percent for the 12th 
consecutive meeting. The Aussie was down 0.5 percent at $0.9283 
 AUD=D4  as it brushed a one-week low. 
    In commodities, Brent crude fell below $102 a barrel, 
pressured by worries about slowing oil demand growth in China 
and Europe, a strong U.S. dollar and ample supplies.  O/R  
    Palladium cut back from the 13 1/2-year high of $910 an 
ounce it reached overnight on fears that Western sanctions will 
curtail supply from Russia, the world's biggest producer of the 
metal. Spot palladium  XPD=  last traded at $885  an ounce. Gold 
also nudged down as risk appetite recovered.  GOL/  
 
 (Additional reporting by Shinichi Saoshiro in Tokyo; Editing by 
Larry King and Susan Fenton) 
 ((marc.jones@thomsonreuters.com; +44)(207 542 9033; Reuters 
Messaging: marc.jones.thomsonreuters.com@reuters.net)) 
  
((To read Reuters Global Investing Blog click on  
http://blogs.reuters.com/globalinvesting;  
for the Macro Scope Blog click on  
http://blogs.reuters.com/macroscope;  
for Hedge Fund Blog Hub  
click on http://blogs.reuters.com/hedgehub) 
((For the state of play of Asian stock markets please click on:  0#.INDEXA )) 
 
Keywords: MARKETS GLOBAL/