European Morning Briefing: Markets Set for Another Cautious Session
Stocks seen flat; USD/JPY 109.24-25; bund yield 0.367%; Brent crude $52.17; gold $1336.06
-Schneider Electric in Talks to Take Control of Aveva Group
Watch For: Eurozone, Germany, France, U.K., Spain, Italy services PMI; eurozone retail trade; no major earnings scheduled
European stocks are unlikely to make much progress at Tuesday's open, with DAX futures up 4 points and FTSE 100 futures 5 points higher.
Asian equities were looking for direction early Tuesday as tensions on the Korean Peninsula kept many investors at bay, while markets lacked guidance due to the Labor Day holiday in the U.S.
"We are seeing some nervousness as at this stage, it remains unclear whether this situation will translate into something that could hurt global trade and financial markets," said Ric Spooner, chief market analyst at CMC Markets.
South Korea's Kospi recently pared early gains after rising as much as 0.5%. The Korean benchmark closed 1.2% lower on Monday. Japan's Nikkei Stock Average was down 0.5% as yen buying continued, though at a slower pace than on Monday. In Australia, the S&P ASX/200 was 0.3% lower as banking stocks sold off. A rate decision from the Reserve Bank of Australia is due later in the session, though the RBA is expected to hold.
Elsewhere in the region, the Shanghai Composite Index was down 0.1%, while Hong Kong's Hang Seng Index and Taiwan's Taiex were both up 0.1%.
France's Schneider Electric is in advanced talks to take control of British engineering software provider Aveva Group, according to people familiar with the matter, after previous talks to merge their software operations collapsed over terms.
The current deal calls for Schneider, a global industrial giant, to fold its software assets into Aveva's operations and pay the U.K. company more than GBP500 million ($646.4 million) in exchange for a controlling stake in the combined entity, in a so-called reverse takeover, according to the people familiar with the matter.
Aveva, with a current market value of about GBP1.2 billion, would maintain its stock listing on the London Stock Exchange and remain headquartered in Cambridge, the people said. A deal could be announced as soon as Tuesday. Sky News first reported the planned tie-up.
The yen quickly jumped to session highs across a number of currencies in Asian trade, with the move following a dip in importer demand to buy the dollar. That's known locally as gotobi--when weekly demand for the greenback by importers tends to put some pressure on dollar-yen.
However, Tuesday was "a very-difficult movement," said Masashi Murata, currency strategist at Brown Brothers Harriman, following moves to safe haven assets. Dollar demand further dipped after banks published their set price, or rates for the day at Y109.66-67. That caused some position corrections. "We don't have any bad news," he added.
ING expects the European Central Bank will "attempt to tame euro upside" at Thursday's meeting.
This won't prevent EUR/USD from rising back above $1.20, ING's analysts said, but the ECB may be able to prevent EUR/USD from rising "meaningfully above" this level.
"Mario Draghi is likely to strike a cautious balance between giving first clear hints at the upcoming tapering and dovish sounds in order to calm the FX market."
ING expects EUR/USD to rise above $1.20 this week, with the euro lifted by expectations the ECB will eventually reduce stimulus, a weaker U.S. dollar and safe haven demand.
The strength of the Swedish krona and the euro is an issue for both the Riksbank and the ECB. Both central banks would prefer a weaker currency to reach their inflation targets, and are as a result "likely to err on the dovish side relative to market expectations" this week, said Paer Magnusson, senior rate strategist at Swedbank.
"The ECB already has a huge task of pushing the euro weaker ahead of it [the meeting], and the Riksbank also fears a stronger krona, so the last thing either central bank would want to do right now is to cause any form of self-inflicted damage," said Paer Magnusson, senior rate strategist at Swedbank.
At 0350 GMT, USD/JPY was 109.24-25, EUR/USD was 1.1910-13 and GBP/USD was 1.2930-32.
The European Central Bank will signal to markets Thursday that changes to quantitative easing are on the way, but there won't be key details until December, Rabobank said in a note Monday.
"Although we expect the ECB to put markets on notice that changes to the asset purchases are incoming, we do not expect Draghi to have a full list of all the details yet," said Rabobank.
"Instead, it seems more likely to us that these details, such as method and pace of tapering, will only be revealed in the December meeting." If accurate, this will create quite an exciting end to the year among ECB watchers as they parse comments from Council members over what the appropriate end to the QE program will look like.
Brent oil and U.S. gasoline futures extended Monday's decline in Asia while the U.S. oil benchmark has trimmed some of its gains as low trading volume continues following the Labor Day holiday in America.
U.S. oil facilities and infrastructure are coming back online after Harvey swamped parts of Texas, boosting U.S. oil futures overseas Monday and capping surging gasoline futures. It has also narrowed the above $5/barrel gap between Brent and WTI oil prices.
At 0125 GMT, October WTI was up 0.2% from Friday's finish at $47.39 a barrel, while November Brent was down 0.3% from Monday's settlement at $52.17. October gasoline was down 3.5% from Friday's level at $1.6886/gallon; last week's 13% jump was the biggest front-month move in 5 1/2 years.
Spot gold continued to hover close to an 11-month higher in Asian trading, spurred by ongoing geopolitical tensions.
Following the nuclear test by North Korea, investors remain focussed on remarks by U.S. and Korean leaders. They are also awaiting Thursday's ECB meeting. At 0222 GMT, gold was 0.20% higher at $1,336.06/troy ounce.
Copper has rallied hard in recent months, topping $3/pound and hitting 3-year highs.
UBS said fundamentals largely justify the move as supply disruption is proving greater than expected while demand indicators remain robust. Its forecast is for copper to average $2.80 next year and $3 in 2019, and the investment bank said there may be some modest upside to that view.
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