The U.S. dollar rebounded against the euro and Asian stocks slipped on Tuesday as investors braced for the outcome of a Federal Reserve meeting that could disappoint some looking for big policy changes.
There was no uniform outlook for trade in European shares after the previous session's gains and as Asian bourses retreated on China's disappointing import numbers.
The risks are now increasingly being weighted on the downside, noted Cameron Peacock, an analyst at IG Markets.
Any perceived failure from the Fed to be taking positive action over the economy could quite easily be the trigger to another bout of selling across the globe.
Shares in Hong Kong <.HSI> and Shanghai <.SSEC> fell after data showed China's July import growth was below market expectations, pointing to slowing domestic demand and economic activity.
The Bank of Japan kept interest rates steady, as expected, and held off on any new policy steps, which market players said had little market impact.
Shanghai shares fell quite a lot, as did the rest of Asia, and this dragged the Nikkei lower. U.S. stock futures have turned negative as well, said Hiroaki Osakabe, a fund manager at Chibagin Asset Management.
Financial spreadbetters expected Britain's FTSE 100 <.FTSE> to open 8 to 14 points lower, Germany's DAX <.GDAXI> to open between 3 points higher and 18 points lower, and France's CAC-40 <.FCHI> to open 10 points either side of the previous close.
Speculation has been growing that the Fed will signal a need for more stimulus to support growth after a steady stream of soft economic figures, pushing down U.S. bond yields and helping to lift global equities to the highest in three months.
However, acknowledgment of economic deceleration may disappoint some investors who had been betting the Fed would make a bigger move, such as buying bonds to pull down market rates.
I have a feeling that the market has got carried away with the idea of the Fed easing. It seems as if most traders are expecting the Fed to say it will reinvest maturing bonds at least, said a trader at a Japanese bank.
The dollar rose 0.5 percent against a trade-weighted basket of currencies <.DXY>, bumping up against a trendline stretching downwards since June.
The euro fell to $1.3160 from $1.3223 on Monday as investors cut short-dollar positions ahead of the Fed meeting.
STOCKS REFLECT CAUTION AHEAD OF FED
Japanese stocks reversed earlier gains to close lower after the Bank of Japan left rates unchanged, with the Nikkei share average <.N225> down 0.2 percent as investors bought back counters they had sold on Monday.
The MSCI index of Asia Pacific stocks outside Japan fell 1.2 percent <.MIAPJ0000PUS> to its lowest in four trading sessions after hitting a three-month high on Monday.
Developed government bond markets were mixed, with 10-year bond futures in Japan and Australia down slightly and U.S. futures steady.
The spread of the 10-year U.S. Treasury yield over the 2-year note in the cash market hit its narrowest since May 2009, with investors clinging to the higher yields of later maturity bonds.
Bond market participants are split on what the Fed will do. Fifty-two percent of money managers do not expect the Fed to flag additional policy easing, while 48 percent predict it will, a Reid Thunberg ICAP survey showed.
If the Fed does not strike a strong enough tone supporting growth, thereby getting closer to buying bonds from the market, the spread could widen again.
The strength in the dollar weighed on U.S. crude prices. Oil for September delivery reversed earlier gains and fell 0.7 percent to $80.94 a barrel ahead of data due later expected to show a decline in U.S. crude inventories.
Gold was largely unchanged on the day, trading just below $1,200 an ounce, ahead of the Fed's meeting. The precious metal is still heading for its 10th straight year of gains.
(Writing by Jan Dahinten in Singapore, additional reporting by Aiko Hayashi in TOKYO; Editing by Neil Fullick)