European markets retained a cautious tone Tuesday, with
investors keeping one eye firmly on the lingering conflict in
Ukraine while trying to gauge whether the European Central Bank
will announce further stimulus measures at its policy meeting later
in the week.
In early trade, the Stoxx Europe 600 advanced 0.2%, broadly in
line with the U.K.'s FTSE and France's CAC. Germany's DAX gained
0.5%.
In currency markets, the euro was broadly unchanged against the
dollar, while Russia's ruble was also steady following Monday's
selloff which saw it hit another 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 without
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, investors' attention has turned to the ECB and the
possibility of it announcing further rate cuts to stimulate the
region's sluggish recovery, or even opting to announce 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, while German
factories had their most sluggish month since September of last
year.
"It's a close call," said Gary Jenkins, a credit strategist at
LNG Capital.
"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," he added.
He said that at this stage Mr. Draghi might also be fearful that
even if QE is implemented, it might not work and Europe might
remain in a low growth, high unemployment state.
In currency markets, the U.S. dollar jumped to a seven-month
high against Japan's yen of 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 their QE program in October.
The U.K. pound meanwhile, came under pressure on a narrowing in
the opinion polls ahead of the vote on Scottish independence
scheduled for September 18.
"We suggest that this narrowing of the latest opinion polls is
likely to see an increase in risk premia for sterling," currency
strategists at Morgan Stanley wrote in a note.
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.
Write to Josie Cox at josie.cox@wsj.com
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