Euro edges lower ahead of ECB meeting, shares choppy

Markets have been expecting ECB President Mario Draghi to unveil a bold plan to tackle the euro zone's debt crisis at Thursday's meeting, but disputes among policymakers over the deal have raised doubts over how detailed the statement will be.

 

The single currency was down just 0.15 per cent at $1.2550, but below its high of $1.2629 posted on Tuesday and over a cent away from Friday's two-month peak of $1.26378.

 

"Many are concerned that the ECB may just give us bare bones, while others are of the view that even if they give details to the plan, it would be a good time to sell the currency as the economic data from the region has been deteriorating," said Jane Foley, senior currency strategist at Rabobank.

 

The prospect of ECB action to ease the current stresses in the European debt market did, however, curtail demand for safe-haven German bonds at an auction of new 10-year paper.

 

The German Finance Agency, which managed the debt sale, only received bids from investors worth 3.93 billion euros for the 5 billion of bonds it wanted to sell.

 

Although analysts said demand might have been affected by the heavy supply elsewhere in the euro zone as the Netherlands was selling a three-year dollar-denominated bond, while triple-A rated Austria also sold bonds on Tuesday.

 

"(The auction) probably reflects the sheer volume of competing 10-year core supply both last week and this week, and of course the ECB event risk," said Credit Agricole rate strategist Peter Chatwell.

 

GROWTH GRIM

 

In equity markets, data showing U.S. factory activity had slowed in August revived concerns over the health of the world's largest economy, heightening the focus on Friday's nonfarm payrolls report, which could persuade the Federal Reserve to ease policy.

 

"We might not get all the details about the ECB bond buying plan tomorrow, but we know it's coming, so it's priced in. Now the question is: how bad is the situation in the U.S. economy? We'll get a better idea on Friday with the payrolls," said David Thebault, head of quantitative sales trading at Global Equities.

 

The growth concerns look set to weigh on U.S. stocks when trading begins on Wall Street later, while new data on the euro zone economy kept gains in European shares in check.

 

After early losses, the FTSEurofirst index of top European shares was up 0.2 percent at 1081.15 points by the mid session, while the blue chip Euro STOXX 50 index was up 0.3 percent to 2443.31 points.

 

The latest gloom on the euro zone came from the Markit composite Purchasing Manager's Index (PMI) for August, which posted a seventh month of contraction. The index fell to 46.3, down from an initial estimate of 46.6 and below July's 46.5.

 

"The final August PMI came in only slightly below its earlier flash estimate, leaving the euro zone economy on course to fall back into technical recession in the third quarter," said Rob Dobson, senior economist at data compiler Markit.

 

Retail sales in the euro zone also ended a two-month run of gains in July when volumes fell 0.2 percent as shoppers in the 17-nation currency area held back spending on food, drink and increasingly expensive fuel.

 

A Reuters poll published last month predicted the bloc would contract 0.2 percent in the three months to September, but Dobson said the latest PMI suggests the downturn could be far worse, with a contraction of 0.5-0.6 percent.

 

COMMODITIES SLIDE

 

The latest data adds to a growing picture that the global economy has slowed, weighing on commodity markets.

 

An HSBC survey of China's large services sector, also out on Wednesday, found it growing at the slowest pace in a year in August, even though firms there hired more workers at higher wages.

 

The price of iron ore and steel have fallen dramatically on signs of slowing activity in China, though the slowdown has renewed hopes for central bank policy easing.

 

Iron ore prices, which have dropped 36 percent since early July, were below $90 a tonne, their weakest level since October 2009.

 

Steel futures hit an all-time low on the Shanghai Futures Exchange, with further falls expected.

 

In oil markets the growth worries pushed Brent crude under $114 a barrel on Wednesday, and U.S. crude futures slid 20 cents to $95.10.

 

Gold, which would benefit if lower growth prompts central banks into action, edged down 0.2 percent to $1,690.71 an ounce but is still trading near a six-month high 

 

Copyright @Thomson Reuters 2012