European shares slip, dollar pauses with central banks in view

Highlights:

• European stocks fall
• US futures slightly higher
• Dollar continues retreat from two-decade peak
• Euro up 0.7% after Reuters report
• Oil steady

European shares slipped on Tuesday, while the dollar hovered below last week's peak, with investors eyeing central bank meetings this week for clues on market direction.

The broader Euro STOXX 600 fell 0.6%, with indexes in Paris and Frankfurt both down 0.9%.

Traders were on edge with few immediate pieces of macroeconomic or political news to drive direction, market players said.

"Right now it's cautious mode. It's not necessarily plain defence and really being short markets," said Olivier Marciot, senior portfolio manager at Unigestion.

"Really little exposures all over the place, and waiting for some sort of clearer direction to deploy risk."

MSCI world equity index, which tracks shares in 50 countries, fell 0.1%.

Wall Street futures gauges pointed to slim gains. US equity markets had closed lower overnight, impacted by reports Apple plans to slow hiring and spending growth next year. 

The dollar continued its slow retreat from last week's two-decade peak, hovering just above a one-week low touched on Monday.

The dollar index - which gauges the greenback against six counterparts - was down 0.3% at 107.100, well back from the high of 109.29 last week, a level not seen since September, 2002.

Euro zone government bond yields edged down as bond markets took comfort from a pullback in lofty gas prices, with German Bund yields falling 2.5 bps to 1.19.

Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.4%.

Market players pointed to central bank meetings later in the week as likely drivers of market moves.

The European Central Bank and Bank of Japan both meet on Thursday, with the ECB widely expected to begin raising rates from their pandemic era lows with a 25 basis point hike, while little change is expected from the ultra dovish BOJ. 

The euro jumped 0.7% to $1.0223 after Reuters reported that ECB policymakers will discuss whether to raise interest rates by 25 or 50 points at their meeting on Thursday to tame record-high inflation. 

MURKY PICTURE

But with markets awaiting major macroeconomic news, the overall picture was murky.

"It's a bit like 'paint by numbers' at the moment, you've got a picture to fill in, but we don't have all the colours yet," said Kerry Craig, global market strategist at JPMorgan Asset Management.

"There are a couple of things missing (such as) the direction of the labour market and unemployment rate in the US, and whether central banks will step back and say 'that's the peak in inflation and we don't need to be as hawkish', or 'we're going to be really aggressive'."

Markets are expecting a large 75 basis point interest rate hike at the US Federal Reserve's meeting next week, away from a flirtation with the chance of an enormous 100 basis point rise.

The euro, under pressure amid soaring energy costs, has recovered somewhat from its brief fall below one US dollar last week for the first time since 2002.

Underscoring the jeopardy the euro faces, Russia's Gazprom has told customers in Europe it cannot guarantee gas supplies because of "extraordinary" circumstances, according to a letter seen by Reuters, upping the ante in an economic tit-for-tat with the West over Moscow's invasion of Ukraine. 

Oil, also struggling to find a clear direction, rose slightly gaining 5% overnight. Brent crude was flat at $105.84 a barrel, while US crude was up 0.2% lower at $102.576.