Adrop in euro
zone factory output after a run of weaker-than expected U.S. data
stalled an eight-day rise in world shares on Thursday, jangling the
nerves of investors positioning for a shift in Fed policy next week.
Moves towards a diplomatic
solution on Syria gave some support to financial markets, but doubts
over what exactly the Fed will announce on September 18 increase the
potential for near-term volatility.
"The
Fed is still likely to taper next week or in October but the trajectory
of the tapering that we had assumed can no longer be taken for
granted," said Ned Rumpeltin, head of G10 FX strategy at Standard
Chartered Bank.
Euro/dollar and
dollar/yen one-week implied volatilities - a gauge of how sharp price
swings will be next week - have shot up as investors try to guess when
and how fast the Fed will start to run down its monetary stimulus.
The
one-week euro/dlr implied volatility traded at around 7.85 percent,
much higher than the equivalent one-month rate which was around 7.2
percent.
The one-week dollar/yen implied volatility was also trading much higher than the one-month level.
Uncertainty
has grown with weaker-than-expected U.S. data, including jobs growth in
August and consumer spending, home building, new home sales, durable
goods orders and industrial production in July.
A
Reuters poll of economists on Monday this week found most now see the
Fed trimming its $85 billion monthly spend on bonds by about $10
billion. This was down from $15 billion in a poll before the jobs
report.
The shifting views have put
pressure on the dollar, which hovered near two-week lows against a
basket of major currencies .DXY on Thursday. U.S. Treasury yields have
dipped to nearer 2.8 percent from over 3 percent last week.
But
the euro slipped against the dollar on Thursday and European shares
ended a run that had taken them near a five-year high when data showed a
surprisingly large drop in industrial output across the currency bloc
in July.
That bolsters the case
for the European Central Bank to keep monetary policy loose in the face
of changes at the Fed and adds weight to the argument that it should
even consider another rate cut.
Europe's broad FTSE Eurofirst 300 index
.FTEU3
was down 0.1 percent by mid-morning at 1,248.33 points, edging away
from a 5-year high of 1,258.09 points reached in late May this year.
The
MSCI world equity index .MIWD00000PUS was slightly lower, with U.S.
stock index futures pointing to further weakness when trading gets
underway on Wall St. .N
ASIAN RELIEF
Reduced
expectations of the degree of Fed tapering eased pressure on emerging
market currencies, which had been driven up as the cheap U.S. money was
pumped into high-yielding stocks and bonds, and are now falling as these
trades reverse.
Indonesia's
central bank unveiled a surprise rate hike to help the rupiah recover
from a 4-1/2 year low. Other Asian central banks were expected to wait
for next week's Fed decision before taking any action.
MSCI's
broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS shed
0.2 percent while the stronger yen and downbeat economic data helped
push Japan's Nikkei stock average
.N225 down 0.3 percent.
In
fixed income markets anticipation of the Fed trimming its stimulus
combined with concerns abut domestic politics drove up Italy's borrowing
costs at an auction of 7.5 billion euros ($10 billion) of new debt.
A
cross-party Senate committee in Italy is due to resume a hearing later
on whether to bar Silvio Berlusconi from political life, at the risk of
prompting the former prime minister's allies to pull out the coalition
government.
No decision by the
Senate is expected until mid-October leaving investors in considerable
uncertainty over whether the government has the strength to overhaul the
economy and manage its budget deficit. <GVD/EUR>
In
commodities, copper slipped 0.9 percent to $7,101 a tonne. An improved
outlook for China's economy and the reduced risk of a strike on Syria
have helped bring copper prices off the three-year lows plumbed in late
June.
Gold skidded 1.8 percent to
$1,342.56 an ounce, its weakest since mid-August while Brent crude added
about 0.8 percent to $112.40 as investors watched diplomatic efforts to
place Syria's chemical weapons under international control stepped up.
U.S.
Secretary of State John Kerry and Russian Foreign Minister Sergei
Lavrov were meeting in Geneva on Thursday to try to agree on a strategy
to eliminate the chemical arsenal.
