By Josie Cox
European investors were cautiously optimistic Tuesday, keeping
an eye firmly on the lingering conflict in Ukraine but also pinning
hopes on the European Central Bank announcing further stimulus
measures at its policy meeting later in the week.
By mid-morning, the Stoxx Europe 600 had advanced 0.4%, broadly
in line with Paris' CAC and London's FTSE. The latter, investors
said, was likely also supported by U.K. construction PMI reaching
its highest level for seven months in August. Germany's DAX gained
0.9%.
Several banks, including BNP Paribas and J.P. Morgan, have
recently said they expect the ECB to take action at Thursday's
meeting, possibly even including a broad-based asset purchase
program knows as quantitative easing, to help bring inflation back
up to target.
On Monday, data showed that activity in the euro zone's
manufacturing sector slowed more sharply than first estimated in
August, with Italy joining France in contraction, piling yet more
pressure on the central bank to act.
"According to our economists, no rate cut and no major change in
language to the ECB statement would be a key disappointment," BNP
Paribas currency strategists wrote in a note. Gary Jenkins, a
credit strategist at LNG Capital, meanwhile, described it as "a
close call."
"My view is still that for [ECB] President Mario Draghi it
remains a last resort, but he is in danger of being backed into a
corner and left with little alternative but to enact QE at some
stage," Mr. Jenkins added.
Mr. Draghi might also be fearful that even if QE is implemented,
it might not work, leaving Europe still burdened with low growth
and high unemployment, Mr. Jenkins said.
In currency markets, the euro was marginally weaker against the
dollar, while Russia's ruble continued to slide steadily, following
a heavy sell-off on Monday when it hit an all-time low against the
dollar.
Ukrainian Defense Minister Valeriy Heletey said Monday that the
army would stop trying to remove separatists from the east, moving
instead to a defensive strategy against what he called a
"full-scale invasion" of Russian regular troops.
His announcement of a change in tactics came as another round of
talks between Kiev, Moscow and the separatists ended with no
apparent results beyond agreeing to meet again Friday.
"A diplomatic solution in Ukraine still seems out of reach,"
Citigroup credit strategist Joseph Faith wrote in a note, while UBS
economist Paul Donovan said that investors now appeared to be
pricing in an escalation of European Union actions, in the form of
more sanctions.
Elsewhere, the U.S. dollar jumped to a seven-month high against
Japan's yen at 104.86 on Tuesday, on expectations that U.S.
monetary stimulus is near an end, while in Japan hopes emerged that
a cabinet reshuffle could lead to increased stakes in domestic
stocks for the country's vast public pension fund.
The dollar has enjoyed support over the last few months, fueled
by a raft of improving U.S. economic data, ranging from improving
consumer confidence to better labor market conditions.
U.S. Federal Reserve officials signaled late last month that
they were on track to end the QE program in October.
The U.K. pound meanwhile, came under pressure on a narrowing of
opinion polls ahead of the vote on Scottish independence scheduled
for Sept. 18.
A YouGov survey for the Sun newspaper and published Tuesday puts
the lead for the 'no' campaign at just 6 percentage points when
excluding undecided voters. That is down sharply from a previous
22-point lead recorded less than a month ago, and a 14-point lead
seen mid-August, on the same basis.
The pound dipped 0.5% against the U.S. dollar to a five-month
low of $1.6539. Some tip it for further falls. Daragh Maher, a
currency strategist at HSBC, said it has the potential to slip to
$1.6250 if the market starts adequately pricing in political
risk.
"We've seen a degree of complacency in sterling about political
risk in the U.K. The most recent polls, however, suggest that a
'no' vote is far from a guarantee," he said.
Back in European equities, Italy's Luxottica Group SpA, the
world's largest eyewear maker, was one of the biggest losers of the
day, on news that Andrea Guerra had stepped down as chief executive
after almost 10 years.
In commodities markets Brent crude oil lost 0.1% to trade at
$102.64 a barrel, while gold declined 0.4% to $1,282.50. In the
U.S., the S&P 500 was seen opening 0.2% higher following
Monday's Labor day holiday.
Futures, however, don't necessarily reflect moves after the
opening bell.
Write to Josie Cox at josie.cox@wsj.com