Germany Labour cost index; France job creation, foreign trade, balance of payments; Italy retail sales' updates from Tod's Group, Deutsche Post, Richemont
Caution will dominate Europe's opening trading session, following a mostly weaker close on Wall Street. In Asia, stocks struggled, the dollar advanced again, Treasury yields dipped, while oil and gold futures barely moved.
European shares are likely to extend losses on Wednesday after a choppy session on Wall Street.
Major U.S. stock indexes closed mostly lower Tuesday, though Nasdaq edged higher to another all-time high, as investors returned from a three-day holiday weekend unsure about the toll the delta variant of the coronavirus will take on the economic outlook.
"Investors should be cautious. The markets should be under more downside pressure," said Darren Schuringa, founder of ASYMmetric ETFs.
"The delta variant, combined with low vaccination rates, has pushed Covid-19 infections once again to over 150,000 confirmed cases per day, slowing the service sector recovery," David Kelly, chief global strategist for JPMorgan Chase's asset management division. "Looking forward, not just at next year but out to 2023, it now appears more likely that the economy will glide down to a slow-but-steady expansion."
Kelly expects a slowdown in corporate earnings growth and higher interest rates to lead to "a renewed focus on valuations."
In Asia, stocks struggled for momentum as the more risk-averse mood spread from Wall Street.
The dollar held its recent gains, with the USD Index hovering around the 92.54 level in cautious Asian trade.
While there hasn't been a clear catalyst for this mood, headlines about rising Covid-19 infections in U.S. hot spots probably haven't helped, NAB said. Overall, it seems that market participants are taking some time to consider the implications of the weaker-than-expected U.S. nonfarm-payrolls figure released on Friday, NAB added.
The euro could rise as the European Central Bank is likely to announce at Thursday's policy meeting that it will reduce the pace of its pandemic bond purchases in the fourth quarter, TD Securities said. The ECB will keep all other policy measures unchanged and will revise its inflation forecasts up sharply for this year and the next, TD forex strategist Mark McCormick said.
Christine Lagarde will want to avoid sounding "overly hawkish," which signals tighter monetary policy, in her press conference after the meeting, emphasizing "persistence" on the bank's accommodative stance. Overall, the meeting should support the euro, potentially sending EUR/USD to 1.20 in coming months from 1.1844 currently, McCormick said.
The Chinese yuan is likely to depreciate as the economy faces further headwinds after being hit by the spread of the Delta coronavirus variant, Commerzbank said.
A slowdown in China's population growth will continue in coming years, lowering the economy's growth potential, particularly if productivity is unchanged, Commerzbank economist Hao Zhou said. U.S.-China tensions will also remain a medium-term risk for China's growth outlook. "All told, downside risks remain for both the economy and the currency." Commerzbank expects USD/CNY to rise to 6.70 by December 2022 from 6.4666 at present.
Treasury yields eased slightly lower in Asia after they rose broadly Tuesday, pushing the 10-year rate to a nearly two-month high. There were no major catalysts on the fixed-income docket, with a dearth of economic reports and Fed speakers.
The "10-year yields managed to edge to the highest level since mid-July but failed to challenge the 1.42% upper bound of the range," wrote BMO Capital Markets strategists Ian Lyngen and Ben Jeffery, in a daily note.
"This isn't to suggest in the run-up to the 10-year reopening that another leg higher in yields as a concession for supply is entirely off the table, although the probability of a meaningful technical breach of support has lessened as the bearish momentum appears to be waning," the strategists wrote.
Ahead of the ECB meeting, Generali Investments said those favoring loose monetary policy and those preferring a tighter stand, "both have valuable arguments for the case of either a steady hand or a first step toward policy normalization."
While ECB staff projections on growth and inflation are likely to be upgraded, "the projected inflation rate toward the end of the forecast horizon in 2023 should remain clearly below the 2% target implying an unchanged forward guidance on rates," Martin Wolburg, senior economist, said.
Regarding pandemic emergency bond purchases, Generali Investments believes the majority of the Governing Council acknowledges less need to pandemic-related support and hence is ready to start the transition.
Oil prices were little changed in Asia after they settled lower Tuesday on strength in the dollar and worries over demand.
Commerzbank said the market is likely to focus on the speed of recovery of U.S. oil production in the Gulf of Mexico following Hurricane Ida. More than 90% of output was still shut down five days after the hurricane. "This means the market was still lacking around 1.7 million barrels of crude oil per day."
Next up for oil markets will be a pair of weekly U.S. oil inventory reports. Weekly data on U.S. petroleum supplies will be released by the Energy Information Administration on Thursday, a day later than usual due to Monday's Labor Day holiday.
Analysts at IHS Markit expect the EIA to report a decline of 3.5 million barrels in domestic crude inventories for the week ended Sept. 3. They also forecast supply declines of 3.3 million barrels for gasoline and 2.8 million barrels for distillates.
Gold edged higher but remained below $1,800, after it suffered its sharpest daily tumble in a month on Tuesday as the dollar and Treasury yields climbed.
OANDA said gold appears to be lacking any near-term positive catalyst at the moment and any rise and fall in prices will depend on the strength of the greenback.
Aluminum prices rose slightly on continued concerns over bauxite supply after the recent coup in Guinea, ING said. Bauxite is essential for making aluminum and supply constraints could crimp aluminum production in China.
Chinese iron-ore futures rose, extending Tuesday's rebound from a recent low. China's August trade data showed a strong rise in iron-ore imports, suggesting robust demand, ANZ said. On the supply side, ANZ said there were market concerns that exporters including Vale, Rio Tinto and BHP could miss their export estimates due to Covid-19 disruptions and other risks.
Hongyuan Futures said iron-ore prices may also be supported in the near term by steel mills' restocking of the raw material.
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