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 Falling food and energy prices saw euro zone inflation slow to 0.3
percent this month, piling the pressure on the European Central Bank
to make clear when it meets Thursday that it is ready to take more
preventative action.
World markets had already been in a hesitant mood as investors
wondered what China's response would be to civil unrest in Hong
Kong, and as the dollar's strength dominated the end of what has
been a choppy third quarter.
On a broader scale, MSCI's 45-country All World stock index, was on
course for a drop of almost 3 percent on the month and its biggest
quarterly fall since Q2 2012, when the euro zone's debt crisis was
at its most intense.
"We should not be more concerned than necessary on this," said
Didier Duret, chief investment officer at ABN Amro.
"This data is still backward looking. What is important is that the
euro is going down substantially, the ECB is very active and the
U.S. economy is holding up well."
The new low in euro zone inflation kicked the euro below $1.26 for
the first time since September 2012 and although the region's stocks
got a minor lift from ECB easing bets the impact was limited.
The greenback had already been at a four-year peak against a basket
of major currencies and its gains of 3.5 percent so far this month
were the largest since February 2013 and in six years on a quarterly
basis.
The FTSEurofirst 300 index of top European shares was last up 0.5
percent at 1,379 points on the day, but it was barely changed on the
month while the euro was staring at its biggest monthly drop since
February 2013.
German government bonds, Europe's benchmark in the fixed income
market, were also heading for their first rise in yields -- a
measure of the interest markets charge governments to borrow -- in
seven months.
HONG KONG
As well as signs the era of record low interest rates is finally
coming to an end in the world's largest economy, the United States,
investors have also had to cope with a host of global geopolitical
difficulties in recent months.
From Cold War-style tensions between the West and Russia over
Ukraine to U.S.-led bombing in the Middle East to combat Islamist
fundamentalism, it has all been there.
In the latest of those tensions, tens of thousands of pro-democracy
protesters blocked Hong Kong streets on Tuesday, in one of the
biggest political challenges to Beijing since the Tiananmen Square
crackdown 25 years ago.
Hong Kong's Hang Seng Index shed another 1.3 percent to its lowest
in three months. MSCI's broadest index of Asia-Pacific shares
outside Japan lost 0.3 percent having already fallen sharply on
Monday.
The unrest was an added complication for investors amid
long-standing concerns about the health of China's economy.
An HSBC survey of manufacturing (PMI) for September disappointed
slightly by showing a final reading of 50.2, steady on August but
down from its preliminary 50.5.
One bright spot was a measure of new export orders which climbed to
a 4-1/2-year-high of 54.5. The official version of the PMI is due on
Wednesday.
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Chinese shares have been less troubled by events in Hong Kong,
perhaps because news and images of the protests are hard to come by
on the mainland. The Shanghai index inched up 0.1 percent to near a
19-month peak. "We think the risks to growth are still on the
downside and warrant more accommodative monetary as well as fiscal
policies," said Qu Hongbin, chief economist for China at HSBC.
EMERGING STRAINS
One of the worst-performing major currencies this month was the New
Zealand dollar, which is down nearly 7 percent.
Data on Monday confirming the Reserve Bank of New Zealand had
intervened to weaken the currency sent it as low as $0.7708, before
a bounce to $0.7802.
The stronger U.S. dollar has been a heavy weight on many commodities
since it makes them more expensive for buyers using other
currencies.
Spot gold was down at $1,208.40 an ounce, not far from last week's
trough at $1,206.85 and poised to post its sharpest monthly loss
since June 2013. U.S. crude oil nudged up a couple of cents to
$94.70 a barrel, after managing a modest rally on Monday. Brent
inched to $97.53. but remained uncomfortably close to its recent
two-year low.
Oil prices on both sides of the Atlantic were on track for their
third monthly loss in a row due to ample supply and subdued demand
in Europe and China.
For emerging markets it has been a similarly tough struggle. Emerging equities were set for their biggest quarterly loss in more
than a year, currencies traded at multi-months low while emerging
bond spreads were at their widest since March, having blown out 50
basis points over the quarter.
"What we are seeing is a change from the summer when markets were
just starting to get uneasy about central bank action. That rally
evaporated because of new negative top-down themes that wiped out
any positives," said Erste Bank's Henning Esskuchen.
(Additional reporting by Lionel Laurent; Editing by Angus MacSwan)
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