Markets pause temporarily after price drop

A look at the day ahead in European and global markets by Ankur Banerjee

Markets took a breather after stocks have fallen since the start of the week, but sentiment remained fragile as concerns resurfaced over the outlook for the U.S. economy and investors focused on this week’s jobs reports.

Employment data released on Wednesday suggested the U.S. labor market was losing steam, raising concerns that the Federal Reserve could resort to significant interest rate cuts, while additional reports, including Friday’s nonfarm payrolls data, kept sentiment elevated.

Futures indicated European stock markets were set for a mixed open after Asian shares rose 0.4% on Thursday, recouping some of the week’s losses, although MSCI’s broadest index of Asia-Pacific shares outside Japan is still down 2.2% so far this week.

Risk sentiment remained fragile, with the yen holding on to its gains from the week as traders sought safe assets while the dollar was steady during Asian hours after weakness overnight.

Aggressive rhetoric from the Bank of Japan also supported the yen after BOJ board member Hajime Takata suggested the central bank should stay the course on raising interest rates.

While the focus this week will be on the US non-farm payrolls report, released on Friday, investors will be kept busy by US jobless claims figures and eurozone retail sales data, released on Thursday.

Markets are looking for clues on whether the data will dictate a 25 basis point (bps) or 50 bps interest rate cut by the Fed at its meeting later this month. Traders added to bets of a 50 bps cut after the job openings data and are now pricing in a 44% probability, up from 38% the previous day.

Investors are also anticipating a 110 basis point rate cut at the Fed’s final three meetings this year, and with the Fed’s focus on the labor market, it appears that economic data in the coming weeks will be scrutinized by increasingly nervous investors.

Key developments that could influence markets on Thursday:

Economic events: Eurozone retail sales in August; August construction PMI data for Germany, France and the Eurozone

(By Ankur Banerjee; edited by Edmund Klamann)