By Lawrence White and Ankur Banerjee
LONDON (Reuters) -Stocks, bonds and oil prices all steadied on Tuesday in a market lull ahead of a slew of data this week, including U.S. inflation numbers, which could clarify the Federal Reserve’s policy outlook after market volatility last week.
Europe’s index edged down 0.1% in thin trade as investors held back from making big bets ahead of U.S. producer price data at 1230 GMT.
U.S. stock futures echoed the tentative tone, with E-minis up 0.22% and E-minis gaining 0.32%, while futures linked to the Dow dipped as key index constituent Home Depot (NYSE:) forecast a decline in annual profit.
jumped more than 3% following a holiday on Monday, a welcome relief after last week’s wild swings that began with a massive sell-off spurred by a rising yen and fears of a U.S. recession. ()
“While aftershocks might reveal vulnerabilities, we continue to view recent volatility as being an equivalent of a ‘heart palpitation’ not a ‘cardiac arrest’,” Viktor Shvets, head of global desk strategy at Macquarie Capital said in a note.
“We also maintain that the nervousness about a U.S. slowdown is overdone.”
The yen dropped 0.08% to 147.3 per dollar on Tuesday, having touched a seven-month high of 141.675 on Monday last week, a far cry from the 38-year lows of 161.96 it was rooted to at the start of July.
A Bank of Japan rate rise last month following bouts of intervention from Tokyo earlier in July wrong-footed investors and led them to bail out of popular carry trades, which use the currency of a low-rate market to fund investments with higher returns.
The latest weekly data to Aug. 6 showed that leveraged funds – typically hedge funds and various types of money managers – closed their positions in the yen at the quickest rate since March 2011.
Given the yen’s recent rally, dollar-yen is now more in sync with its yield differential, according to Karsten Junius, chief economist at Bank J. Safra Sarasin.
“Another wave of the yen-funded carry trade unwind will likely push the yen still somewhat higher towards year-end. Yet we do not expect USD-JPY to fall meaningfully below 140,” he said.
DATA HEAVY WEEK
Data this week could sharpen views on the Federal Reserve’s next move. Markets are currently evenly split between a 25 basis-point cut or a 50-bp cut at the next meeting in September.
Traders are pricing in 100 bps of cuts this year.
Surprisingly soft payrolls data kicked off the market meltdown at the start of last week but strong U.S. data since then has eased slowdown fears.
Any hints of soft inflationary pressures could cause financial markets to double down on wagers the Fed will sharply cut rates this year, which would weigh on the dollar, said Kristina Clifton, a senior economist at Commonwealth Bank of Australia (OTC:).
U.S. consumer price index data for July is due on Wednesday and expected to show month-on-month inflation ticked up to 0.2%. Retail sales data is scheduled for Thursday.
Euro zone bond yields were little changed. Germany’s 10-year yield, the benchmark for the euro zone, was steady at 2.201%. It hit its lowest since January at 2.074% last week.
The , which measures the U.S. currency against six others, was 0.08% higher at 103.17. The euro was steady at $1.0940, while sterling was up 0.1% at $1.2778.
In commodities, futures eased 0.6% to $81.81 a barrel, while U.S. West Texas Intermediate crude futures slipped to $79.67 a barrel, down 0.5%. Brent had gained more than 3% on Monday, while futures had risen more than 4%. [O/R]
