The euro climbed and stocks inched higher on Thursday, as markets waited to hear just how close the European Central Bank is to scaling back its more than 2 trillion euro ($2.75 trillion) stimulus programme.
The was relief of sorts too after Donald Trump and US Congress leaders struck a surprise deal to push a showdown on the country's debt limit back to December, and that there had been no further escalation in the North Korea crisis.
A fifth day of gains in auto stocks helped German shares outperform a sluggish open for European equities with banks under pressure before the much-awaited ECB meeting.
ECB President Mario Draghi is expected to lay the groundwork to wind back its asset purchase programme, though few investors expect to see a clear framework just yet.
The euro's sharp rise this year has started to cause some discomfort in part of the euro zone. It drifted higher against a broad swathe of currencies in early trading.
A fourth day of gains took it back above $1.1950 against the dollar, while a broad tick higher in European bond yields pushed 10-year German debt up 2 basis point to 0.36 per cent and Spanish and Italian paper to 1.45 and 2 per cent, respectively.
“Most people are on the same page that the ECB will do something to reduce their accommodation (soon),” said JP Morgan Asset Management Strategist Nandini Ramakrishnan.
“We don't expect them to announce the start of tapering this meeting, but we do expect them to give us an idea they will start in January. The details are more likely to come at the October meeting,” she added.
Canadas dollar held its gains, after a surprise interest rate rise on Wednesday reminded everyone that G7 monetary settings will not remain super-easy forever.
It also showed the very clear implication of policy tightening right now - the Canadian dollar surged more than 2 per cent at one point to its highest levels in two years. And analysts say that is the ECBs main conundrum.
All the economic activity signals suggest it should take its foot off the gas, but the 13 per cent surge of the euro already this year is playing havoc with its sub-target inflation outlook and it will want to step lightly for fear of compounding the problem with another exchange rate jump.
The Swedish crown, which is the only Northern European currency to have risen against the euro this year, fell after its central bank said it was introducing a bigger buffer on its inflation target. That should give it more leeway on policy moves.
US debt deal
Asian markets had been mildly risk-on overnight. China's yuan rose past the psychologically important 6.5 per dollar level for the first time since May 2016. MSCI's broadest index of Asia-Pacific shares gained 0.3 per cent, while Japan's Nikkei rose 0.2 per cent.
South Korea's KOSPI, which has been burdened by tensions over North Korea, jumped 1.2 per cent too, on course to mark its biggest gain in four months amid signs that major powers were talking intensively on the situation.
Speaking in Russia, South Korean President Moon Jae-in said he was having discussions with the leaders of Russia, Japan and the United States and that there would be no war on the peninsula.
Sentiment had also been helped after US President Donald Trump forged a surprising deal with Democrats in Congress to raise the US debt limit and provide government funding until Dec. 15, embracing his political adversaries and blindsiding fellow Republicans in a rare bipartisan accord.
There was some disappointment the deal had been so short term. But US economic data was also fairly upbeat. A gauge of services sector activity by the Institute for Supply Management (ISM) accelerated in August.
“The deadline on the debt ceiling has been extended just by three months so it will come back to haunt markets again later this year. Still, markets liked it as we don't have to worry about it for now,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.
The news lifted yields on US Treasuries, with the 10-year yield holding back to 2.1 per cent from its 10-month low of 2.054 per cent touched on Wednesday.
Hurricane effect
In dommodities, oil prices maintained much of this week's strong gains as the reopening of US Gulf Coast refineries improved the outlook after sharp falls caused by Hurricane Harvey.
US crude futures were at $49.07 per barrel, down 0.2 per cent from late US levels after having gained 3.0 per cent in the previous three sessions. Brent traded at $54.11 a barrel, down 0.2 percent but still not far from its 3-1/2-month high of $54.31 touched on Wednesday.
Traders are now shifting their focus to Hurricane Irma, ranked as one of the five most powerful Atlantic hurricanes in the last 80 years, which was passing over the northernmost Virgin Islands on Wednesday afternoon and expected to reach Florida at the weekend.