European stocks fell ahead of the European Central Bank meeting due later Thursday.
The ECB will issue its latest policy statement, with policy makers offering their assessment of the economy and inflation. Some investors are betting that the central bank will disclose plans to start paring back its purchase of government bonds through an emergency program that was meant to bolster credit markets and growth during the pandemic.
"The real unknown is if the ECB will revise its inflation and growth forecast," said Agnès Belaisch, chief European strategist at the Barings Investment Institute.
"If it raises its inflation forecast closer to 2%, that will make markets wonder if it could overshoot and if the ECB could have to raise interest rates."
Data in focus:
ECB nerves dampened the reaction to economic data from Germany showing that exports in July were stronger than expected, adding weight to recent upbeat production figures in Europe's largest economy.
Meanwhile, the U.K.'s labor force has shrunk by 1.6% since the pandemic began, mainly due to the fall of participation in the job market and less migration, Deutsche Bank Senior Economist Sanjay Raja said.
Some people left the labor force during the pandemic due to early retirements, return to studying or simply due to being discouraged, he said.
On the migration front, the combination of closed borders due to health concerns and Brexit also hit the labor force. A smaller labor force will make getting back to pre-pandemic GDP levels a little harder and will increase supply frictions in the labor market, he said. GDP in the medium-term is likely to be weaker relative to its pre-pandemic trend, he added.
Stock futures fell ahead of fresh data on jobless claims and an update to the European Central Bank's monetary policy.
Investors' optimism has waned this week following a jobs report that showed a sharp slowdown in the pace of hiring in the U.S., and signs that the pace of economic recovery weakened over the summer due to the Delta variant of Covid-19. Questions around when the Federal Reserve and the ECB will begin to pare back their stimulus programs is also weighing on sentiment, money managers said.
"We're slightly more cautious," said Charles Hepworth, an investment director at GAM Investments. "It does feel that people are getting a bit freaked out by valuations. The Delta variant transmission is a threat for global growth. If you get tapering too soon, that risks derailing the recovery."
The Cboe Volatility Index-Wall Street's so-called fear gauge, also known as the VIX-ticked up to 19.
Investors will get fresh figures at 8:30 a.m. ET on the number of Americans who applied for first-time unemployment benefits, a metric that is seen as a proxy for layoffs, in the week ended Sept. 4. The Fed has said that inflation and the labor market are two key factors it is monitoring to determine changes to monetary policy.
The dollar fell after gains in the previous session, which were led by increased demand for safe havens on concerns about the pandemic derailing the global recovery and central banks starting to scale back stimulus.
The DXY dollar index fell 0.1% to 92.5570 after reaching a 12-day high of 92.8620 on Wednesday.
"The [DXY's] rise overnight leaves it in the middle of its recent trading range between 92.00 and 93.20, which I still expect to contain the week's trading," Oanda analyst Jeffrey Halley said.
The euro could fall further against the pound, with the ECB unlikely to say it will slow the pace of pandemic bond purchases at its policy meeting later, ING said.
"While cable [GBP/USD] remains a function of the dollar and risk-sentiment dynamics we expect EUR/GBP to trend lower today...as the ECB may fail to meet hawkish expectations embedded in the euro," ING analysts said.
The pound will see no idiosyncratic drivers on Thursday given an empty U.K. economic data calendar and the absence of speeches from Bank of England officials, they said.
In bond markets, the yield on the 10-year Treasury note ticked down to 1.322% from 1.333% Wednesday.
The ECB is expected to deliver a "soft taper" Thursday, RBC Capital Markets said. Despite a slowdown in purchases under the emergency pandemic purchase program, the "ECB will stand out as one of the most dovish central banks in the G-10 space," analysts at the bank said.
The ECB currently purchases around EUR80 billion of bonds a month.
"Real yields remain low or even falling and spreads of both sovereign as well as corporate issuers remain tight," they say, adding that this should be well received by the ECB governing council, "who made it their mission to keep financing conditions as accommodative as possible."
TwentyFour Asset Management expects a return to higher U.S. Treasury yields and the associated knock-on effects for financial markets as the main risk for fixed-income investors toward the year-end.
"In recent weeks Treasury yields have resumed their slow grind higher, with much less resistance, as the short base feels significantly smaller, " Mark Holman, chief investment officer at the asset manager, said.
The data backdrop is more balanced, while as each month goes by, the economy gets closer to meeting the Federal Reserve's mandate, thereby allowing them to commence tapering, he said.
TwentyFour AM's base case is that 10-year U.S. Treasury yields will end the year between 1.50% and 1.75%.
Brent crude oil was flat and WTI futures slipped, with prices slightly below flat for the week so far. U.S. oil stats released Wednesday were rather constructive, said DNB's Helge Andre Martinsen.
API data showed a bigger-than-expected drop in gasoline inventories, though crude draws undershot expectations. EIA data will be in focus later, after the body released its short-term energy outlook on Wednesday, which contained slight downward revisions to its global oil demand forecasts for this year and next.
Separately, the market also faces the potential risk of disruptions to Libyan supply, with protests at eastern oil terminals and reports of tankers being blocked.
Aluminum prices set a fresh high amid supply concerns. Three-month aluminum on the LME was up 1.3% at $2,828.50 a metric ton, its highest level since 2008.
China has been cracking down on illegal aluminum production while curtailing the activities of other producers of the metal in order to reduce its carbon emissions.
The supply picture has been further clouded by a coup in Guinea, which produces 22% of the world's bauxite, crucial for making aluminum.
"The coup in Guinea is further accentuating the metals supply risks plaguing aluminium markets," said TD Securities.
The supply picture is drawing in speculators, the bank said. "This further reinforces our view for aluminium to sustainably outperform copper prices," said TD.
Gold prices were listless ahead of the ECB.
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