European stock futures rise as S&P 500 contracts fall

Hong Kong - European stock index futures rose, while US contracts fell with oil as investors assessed the outlook for Federal Reserve policy and China’s economy following a turbulent couple of days in financial markets.

The MSCI Asia Pacific Index held near a one-month low, after sliding more than 3% over the last two trading sessions. Hong Kong shares pared gains and Shanghai equities declined after a slew of Chinese data failed to convince investors that the world’s second-biggest economy is improving.

Oil dropped to below $46 a barrel and the currencies of resource-exporting nations weakened. Gold advanced after dovish comments from Federal Reserve Governor Lael Brainard damped expectations for an interest-rate increase next week.

Brainard signalled her reluctance to raise borrowing costs even as she acknowledged that the US economy was making gradual progress toward achieving the authority’s goals. Her comments came after financial markets were jolted out of a period of relative calm by signs central banks in Europe and Japan are questioning the ability of loose policy to revive inflation and economic growth.

The Fed and the Bank of Japan have policy decisions on September 21, with the latter weighing the case for more stimulus.

"With Brainard’s remarks, rate-hike expectations have backed down," said Toshihiko Matsuno, a senior strategist at SMBC Friend Securities Company in Tokyo. "But the market isn’t likely to take on an aggressive buying mode before the results from the BOJ and the Fed’s monetary policy meetings next week."

The probability of a Fed rate hike at next week’s meeting dropped by eight percentage points on Monday to 22%, futures prices indicate. The European Central Bank left policy unchanged at a review last week and President Mario Draghi played down the prospect of further stimulus.

Stocks

Futures on the Euro Stoxx 50 Index added 0.6% as of 7:17 a.m. London time. Contracts on the S&P 500 fell 0.5%, after the underlying gauge advanced 1.5% in the last session.

The MSCI Asia Pacific Index was little changed, after sliding on Monday by the most since June. Shares in Indonesia, Malaysia and Singapore fell after holidays led to them missing out on the last session’s rout, while the Stock Exchange of Thailand Index climbed for the first time in a week.

Hong Kong’s Hang Seng Index gained 0.6%, after tumbling 3.4% on Monday, and the Shanghai Composite Index was down 0.3%. China’s factory output, fixed-asset investment and retail sales all expanded in August by more than economists forecast, data showed on Tuesday.

"Though China’s industrial production and retail sales beat expectations, people won’t expect data to continue to improve," said Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. "The data also don’t signal any intention for economic stimulus, so the market can’t rebound strongly."

Samsung Electronics Company jumped 4.4% in Seoul, recovering from a 7% slide in the last session that stemmed from a recall of its Note 7 mobile phones.

Currencies

The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, gained 0.2% after dropping 0.3% on Monday. The yen weakened less than 0.1%, having surged 0.8% in the last session as Brainard said the case for the Fed to raise rates was "less compelling."

"Dollar-yen is obviously one of the most Fed-sensitive currency pairs," said Sean Callow, a senior currency strategist at Westpac Banking Corporation in Sydney.

"In the wake of Brainard’s speech and with looming data likely to tilt to the soft side, we expect pricing for Fed tightening to wane further."

Malaysia’s ringgit sank as much as 1.3% from Friday’s close to its weakest level since June after a decline in oil prices dimmed prospects for Asia’s only major net exporter of crude.

In addition, troubled state investment company 1Malaysia Development faces an arbitration hearing in which Abu Dhabi’s sovereign wealth fund is seeking to be paid $6.5bn.

Australia’s dollar fell 0.5%, while the Mexican peso and South Africa’s rand dropped 0.7%.

Commodities

Crude dropped 0.8% to $45.90 a barrel in New York, after gaining 0.9% on Monday. US data due on Wednesday are forecast to show the country’s oil inventories rose by 4 million barrels last week, which may fuel concerns over a glut.

OPEC also revised up its projections for rival supplies in 2017, predicting an increase in output from outside the group before major producers meet in Algiers for talks later this month.

"Inventories remain high, they’re well above five-year trend levels,” said David Lennox, a resources analyst at Fat Prophets in Sydney.

"The market is just waiting to see what happens at the OPEC meeting. If there is a concrete deal and it’s actioned, we’d expect to see prices rally."

Gold gained for the first time in a week, rising 0.1% after Brainard’s comments weighed on the dollar. Aluminium rose from a three-month low, supported by the economic data from China, the world’s largest consumer of industrial metals. Chinese industrial production increased 6.3% from a year earlier in August, the figures showed.

Bonds

US Treasuries due in a decade were little changed and yielded 1.66%.  The rate touched 1.70% on Monday, the highest level since June. Pacific Investment Management Company’s Total Return Fund, the world’s biggest actively run debt fund, cut the duration of its holdings in August and trimmed its ownership of US government securities.
 
Investors will get a chance to bid on the longest-term US debt in Tuesday’s 30-year auction. So-called long bonds have fallen 3.4% in September, headed for their steepest monthly loss in more than a year, based on Bank of America Corporation data.

The yield on Japan’s 20-year bonds fell two basis points to 0.445% after an auction of the tenor achieved a higher price than was forecast by any of the 13 traders in a Bloomberg survey.