European stocks rose as concerns over giant property developer China Evergrande Group eased and ahead of the U.S. Federal Reserve interest-rate decision later.
China's Shanghai Composite reopened after a holiday to muted gains, closing up 0.4%. Markets in Hong Kong were closed for a holiday Wednesday. Hong Kong's Hang Seng Index sold off earlier this week alongside broader markets as investors feared that defaults from one of China's biggest developers could create contagion risks in the broader market.
An onshore unit of Evergrande said Wednesday it would make an interest payment on time this week, though the debt-ridden conglomerate is seen missing a separate payment due on dollar bonds. Investors expect the Chinese government will step in to stave off ripple effects that could affect the country's growth and weigh on the global economic recovery.
"We don't know yet what that attempt to limit contagion is going to be, but the market does expect that Beijing will act," said Susannah Streeter, senior investment and markets analyst at U.K. asset manager and stockbroker Hargreaves Lansdown.
Shares on the move:
Mining, financial and oil stocks advance while gaming shares rise following an improved offer for Entain from DraftKings.
Data in focus:
Following drop in purchasing managers indexes across Europe in August, early surveys and most high-frequency data point to a further moderation in growth momentum across the continent, Goldman Sachs said.
The bank forecasts the PMIs declining again in September, with the eurozone composite PMI falling to 57.4 from 59.0 in August.
Moroever, Goldman Sachs expects the composite PMI for the U.K. to fall to 53.8 in September from 54.8 in August. "Despite these projected declines, we expect the PMIs to remain well in expansionary territory, consistent with our forecast of continued firm growth across Europe and the robust forward-looking subcomponents of the PMIs," Goldman Sachs said.
PMIs for the eurozone and the U.K. will be published Thursday.
With no single party holding a convincing lead, the next German government will probably be a three-party coalition for the first time since the early post-war years, UBS economists Dean Turner and Maximilian Kunkel said.
For investors, key areas to focus on are climate change, digitalization, fiscal policy and appetite for further European Union integration, the economists said.
"Most of the major political parties have pledged to deliver more in these areas, particularly the first two," UBS said.
However, the full extent of any changes won't be known until collation negotiations are complete, the economists added.
Stock futures rose as investors awaited a policy update from the Fed.
Investors are awaiting an update to the Fed's monetary policy and economic projections. Officials are due to release a statement at 2 p.m. ET, followed by a press conference.
Expectations that Fed Chairman Jerome Powell could use the occasion to mark the scaling back of the pace of bond purchases this year have waned due to Evergrande fears and concerns over the pace of the U.S. labor market recovery, money managers say.
Investors expect that any such reduction would be extremely gradual.
"Today it's a bit of a wait-and-see mode in terms of what the Federal Reserve will do," Ms. Streeter said.
"With Evergrande, there are concerns over what might happen with the global economy so there's some expectation that officials will take their foot off the pedal very slowly."
The dollar's reaction to the Fed's policy statement will likely depend on the interest-rate outlook, given it is widely expected that the central bank will signal a decision on tapering asset purchases will be made in November or December, Commerzbank said.
Fed projections that point to rate increases starting earlier "would certainly be dollar positive," said strategist You-Na Park-Heger.
However, recent weaker economic data would justify caution and the Fed may try to dampen rate-rise expectations, she said.
"Today's Fed meeting might not provide any new impetus as far as EUR/USD is concerned, and it is possible that USD bulls will be disappointed," she said. A surprise failure to signal tapering would "constitute a bitter disappointment" and the dollar would weaken, she added.
The dollar should stay supported by safe-haven demand even if the Fed is more cautious about prospects for tapering asset purchases than some expect, UniCredit said.
The dollar "is enjoying renewed support due to its safe-haven status" and concerns over China are likely to ensure trade in major currencies remains nervous, it said. This may help offset any "broad-based downward correction" it would otherwise suffer if the Fed doesn't "sound as hawkish as some in the market expect."
Although an upward revision to interest-rate projections would be positive, the Fed will likely stress tapering will be gradual and won't necessarily herald rate increases, UniCredit said.
The pound's recent falls and its underperformance compared with other higher-beta currencies suggest markets "have turned less confident" that the Bank of England "will be able to stick to its broadly optimistic tone" at Thursday's policy announcement, ING analysts said.
Increasing risk aversion on financial markets has caused sterling to weaken in recent days, they said. GBP/USD fell 0.2% to a one-month low of 1.3630, according to FactSet, though a cautious Fed announcement could prompt a recovery to around 1.3700 as the dollar weakens, ING said.
The Fed's policy decision due later should be neutral for European corporate bond markets as signals regarding a planned tapering of bond purchases later this year are widely expected, said UniCredit.
"As an indication that the Fed will start tapering its asset purchases by the end of the year is broadly expected, this should be neutral for the European credit market," analysts at the bank said.
Fed officials have said that they could begin reducing, or tapering, their $120 billion in monthly purchases of Treasurys and mortgage-backed securities this year.
Some market observers expect Chairman Jerome Powell may signal they are likely to start the process at their following meeting in November.
Eurozone government bond yields were trading higher across the board, indicating better risk sentiment at the start of the day. Aside from any headlines on troubled Chinese property conglomerate Evergrande, the day's focus will be the Fed's policy announcement.
"Investors will be looking to determine whether recent events around surging energy prices, and Evergrande, have altered the prevailing narrative," said Michael Hewson, chief market analyst at CMC Markets.
The ECB's strong corporate bond purchases last week have helped credit spreads to stay largely stable, said UniCredit. Official data showed the central bank ploughed EUR1.058bn in net corporate bond purchases in the week ending Sept. 17, bringing total net purchases to EUR5.4 billion so far this month, analysts at the bank said.
ECB's month-to-date purchases in September represent 77% of this month's estimated net issuance of EUR 7bn billion from investment-grade issuers tracked by the Market iBoxx corporate bond index, they sid.
"Against this backdrop, and despite decent primary market activity, investment-grade corporates closed almost flat to marginally wider yesterday," they said.
A moderately looser fiscal stance, that could be expected under the most likely coalition scenarios after the German elections, is unlikely to have an impact on government bond yields as the ECB's bond buying program will continue to keep Bund supply relative scarce, said UBS Global Wealth Management's economist Dean Turner and strategist Maximilian Kunkel.
"In fact, if Germany issues green bonds to fund investment in preventing climate change, demand is likely to be even higher given the increasing demand for this sub-asset class," they said.
Only a left-wing, red-red-green government could put upward pressure on bond yields in the short term because markets would likely translate significant fiscal pledges into a more substantial supply in Bunds.
Oil prices rose, with weekly API inventory data showing a sharp decline in inventories, according to DNB Markets' Helge Andre Martinsen. U.S. crude stocks fell 6.1 million barrels versus a consensus forecast of 3 million, making the overall figures "bullish," he added.
Elsewhere, in a relatively quiet week, investors are absorbing Russian forecasts for a bumper production year next year, awaiting U.S. Energy Information Administration data due later Wednesday, and continuing to watch European gas prices.
Copper prices jumped as Chinese traders return to the market following a public holiday. Three-month copper prices on the LME rose 2.3% to $9,221 a metric ton.
Chinese markets reopened Wednesday for the first time since Friday and helped push up metals prices which had slumped during their absence.
Some positive news about China Evergrande also helped lift the mood: the indebted company said they will meet an interest payment tomorrow. Still, uncertainty remains about the property giant's future.
"Prices mean-reversed after falling during the Chinese absence and there was a bit of positive sentiment sipping back into markets after the real estate unit of China Evergrande Group, " Anna Stablum at Marex said.
Gold prices were unchanged in European trade.
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