September 2, 2014 / 10:03 AM / 4 years ago

GLOBAL MARKETS-Risk appetite flickers as ECB bets hold down euro

* Europe shares edge higher after gains in Japan, China
    * Wall St slightly higher to flat at reopen after Labor Day
    * Dollar/yen hits seven-month high, euro at new one-year low
    * U.S. ISM manufacturing eyed for more dollar cues
    * Russia sanctions tensions bubble

    By Marc Jones
    LONDON, Sept 2 (Reuters) - Risk appetite flickered back to
life in financial markets on Tuesday with the dollar and
European and Japanese shares rising while safe-haven bonds, the
yen and gold all took a step back.
    The dollar rose to its highest since January against the yen
and the euro slipped to a one-year low after another drop in
euro zone producer prices heightened speculation about what the
ECB will do when it meets on Thursday.
    U.S. stock indexes were marginally higher or steady as
markets reopened after the long Labor Day weekend, with
investors awaiting a flurry of manufacturing data. 
    Investors in Asia had been subdued, having been robbed of
their usual U.S. lead-in overnight, but the mood in Europe had
seemed brighter until fresh talk of sanctions on Russia and more
soft producer prices data triggered a pullback.
    As U.S. trading neared, European stocks  
 were left battling to stay in the black, with only the
Dax in Germany holding onto any real gains.
    Ukraine said 15 of its soldiers had been killed in the past
24 hours in fighting with pro-Russian separatists backed by
Russian troops, while Europe's next foreign policy chief said
the bloc's leaders would decide on a package of new sanctions
against Russia by Friday. 
    "We need to respond in the strongest possible way," Italy's
Frederica Mogherini told reporters following a presentation to
EU lawmakers in the European Parliament.
    Russian shares and the rouble were broadly
stable, though, after three days of falls. For those watching
the developments closely, however, the lull was likely to prove
temporary ahead of crisis talks at a NATO meeting in Wales at
the end of the week.    
    "It is never a straight line, so it is a bit of a breather
and a pause (in Ukraine-Russia tensions), but I continue to be
concerned by this situation," said Benoit Anne, an emerging
markets strategist at Societe Generale.
    "And we all wait for the ECB, of course, this week. That is
a major consideration and that will probably send a bullish
signal to risky assets."
    Bond markets have been one of the big beneficiaries of
expectations the ECB will loosen policy to revive the euro
zone's flagging economy, and traders cashed in some of those
gains before Thursday's meeting even as the euro 
continued to edge south.
    Comments by ECB President Mario Draghi late last month led
to bets the central bank is preparing to pump more liquidity
into the system, possibly via purchases of government or
corporate bonds, a measure known as quantitative easing (QE), to
boost the faltering euro zone economy and stave off the risk of
    Sources from within the ECB told Reuters last week that new
action at its meeting this Thursday was unlikely but not
impossible, and the barrier to QE was still "very high".
    Euro zone producer prices fell again last month, by 1.1
percent from a year ago, due to lower energy prices, data showed
on Tuesday. It was the steepest annual drop since April, and the
report caused the euro to tumble as low $1.3109, after
starting the session around $1.3123.
    IHS Global Insight economist Howard Archer said the price
data was "more worrying news on the inflation front for the
ECB," although core inflation, which strips out volatile
elements like energy, has not dropped since November. 
    In Asian trading, Chinese stocks gained for a third day and
Tokyo's Nikkei rose 1.2 percent, its biggest jump in
almost a month. A planned cabinet reshuffle by Japanese Prime
Minister Shinzo Abe helped to fuel reform hopes.
    The dollar was boosted by the flagging euro and by gains in
Tokyo shares that reduced demand for the safe-haven yen. The
U.S. currency rose to a seven-month high of 104.87 yen 
and reached a 14-month high on the heavily traded index
of currencies.
    "This (the euro's trough) is not just about the ECB. Part of
this is a dollar story - the dollar has outperformed a whole
bunch (of developed world currencies)," said Jane Foley, a
senior currency strategist at Rabobank in London.
    Foley added that increased momentum around the idea that the
ECB would loosen policy, and that the Bank of Japan would
introduce another round of QE, was driving the dollar's gains,
with a perception that it was "the best of the bunch".
    Later on Tuesday, an Institute of Supply Management report
on the U.S. manufacturing sector could provide further evidence
of economic improvement and highlight the diverging paths
between the U.S. and euro zone economies. The U.S.
Federal Reserve looks ready to phase out quantitative easing
just as the ECB may consider introducing it.
    Elsewhere, the Australian dollar showed little reaction to
the Reserve Bank of Australia's widely expected decision to keep
its cash rate at a record low 2.5 percent for the 12th
consecutive meeting. The Aussie was down 0.5 percent at $0.9283
 as it brushed a one-week low.
    In commodities, Brent crude fell below $102 a barrel,
pressured by worries about slowing oil demand growth in China
and Europe, a strong U.S. dollar and ample supplies. 
    Palladium cut back from the 13 1/2-year high of $910 an
ounce it reached overnight on fears that Western sanctions will
curtail supply from Russia, the world's biggest producer of the
metal. Spot palladium last traded at $885  an ounce. Gold
also nudged down as risk appetite recovered. 

 (Additional reporting by Shinichi Saoshiro in Tokyo; Editing by
Larry King and Susan Fenton)
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