European Morning Briefing: Markets Grind to a Halt Ahead of the Fed

Features Dow Jones Newswires

Snapshot:

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Stocks seen flat; USD/JPY 111.52-53; bund yield 0.455%; Brent crude $55.56; gold $1307.02

-Mattis Hints at Military Options for North Korea

-Senate Republicans Consider a Trillion-Dollar-Plus Tax Cut for Budget

-Ryanair to Publish List of Cancelled Flights

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-Adidas Overtakes Jordan On List Of Top U.S. Sport Footwear

Watch For: Germany ZEW indicator; eurozone, Italy balance of payments; Hungary interest rate decision; Donald Trump speech at UN; speech by IMF's Christine Lagarde; no major earnings scheduled

Headline News:

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The U.S. has military options available for North Korea that won't put South Korea at grave risk of counterattack, Defense Secretary Jim Mattis said Monday, but he refused to spell out what those are.

Mr. Mattis also said that the U.S. isn't likely to try to shoot down the type of missiles launched so far by North Korea because they haven't threatened the U.S. or its interests.

And asked whether the U.S. was holding discussions with South Korea about the possibility of basing tactical nuclear weapons on the Korean Peninsula, Mr. Mattis said: "We have an open dialogue with our allies on any issue; we are not only friends we are trusted allies, and we bring up all issues."

Senate Republicans are considering writing a budget that would allow for up to $1.5 trillion in tax cuts over the next decade, said two people familiar with the discussions.

Budget talks are continuing and no final decision has been reached yet.

A budget that creates fiscal room for a $1.5 trillion tax cut, if adopted, would then be followed by a tax bill that would specify rate cuts and other policy changes that don't exceed that figure. Calling for a tax cut in the budget would let Republicans lower tax rates while making fewer tough decisions on what tax breaks to eliminate to help pay for the cuts.

Such a plan would assume that tax cuts would boost economic growth and generate revenue to help pay for themselves, but it would also likely mean that Republicans would need to make some of the tax cuts expire after 10 years, leaving decisions to a future Congress they may not control.

Stocks:

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European stock markets face a lackluster opening session Tuesday, with DAX futures down 5 points and FTSE 100 futures up 3 points.

Japan was a bright spot in Asian markets as stocks elsewhere in the region were muted.

Investors are looking ahead to meetings later this week for the Bank of Japan and Federal Reserve. Rate changes aren't expected in either case, though the Fed is expected to detail plans on how it will trim its mammoth balance sheet.

And AxiTrader's Greg McKenna said investors were optimistic about the Trump administration's prospects for legislative progress, given the president's recent shows of bipartisanship.

"There has been an absolute change in the narrative," he added.

The Nikkei rose 1.3%, reaching its best levels in two months and putting the index back above 20000 for the first time since Aug. 8. The yen weakened Monday, which could account for the today's strength in equities.

U.S. stocks hit new highs Monday, with the S&P 500 up 0.1%, the Dow Jones Industrial Average up 0.3% and Nasdaq 0.1% higher.

Corporate News:

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Ryanair said Monday that it will publish on its website a list of flights that will be cancelled over the coming weeks due to a scheduling problem.

The cancellations between Sep. 21 and Oct. 31 are, in part, due to Ryanair's response to a shortage of crew as the airline adjusts its holiday period for staff, as announced last week. Affected customers will be emailed offers of alternative flights, or full refunds and a EUR261 compensation entitlement, the company said.

"This is a mess of our own making," said Ryanair Chief Executive Michael O'Leary.

Adidas has overtaken Jordan to become the number two brand of U.S. sport footwear, according to The NPD Group's August athletic footwear data.

"This is an achievement I never thought I would see in my lifetime," wrote Mike Powell, NPD's sports industry analyst. "Adidas sport footwear sales grew more than half for the month and share grew by nearly half, to 13%." Nike, which is also the parent of the Jordan brand, held on to the top spot.

Forex:

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The dollar eased slightly lower in Asia, as investors awaited this week's Fed meeting.

The Wall Street Journal Dollar Index, which measures the U.S. currency against a basket of 16 others, fell less than 0.1% to 85.32. The dollar had made modest gains Monday.

While few expect the Fed to raise rates, investors will be listening for details for how the central bank plans shrink its $4.5 trillion balance sheet in the months ahead.

Investors will also be paying close attention to any comments on the health of the economy, with continued confidence in officials' expectations for a recovery in growth and inflation likely to support the dollar, analysts at Commonwealth Foreign Exchange said in a note to clients.

Stronger-than-expected consumer price data last week has bolstered expectations that the Fed will deliver a third rate increase before the year is over.

Federal-funds futures, used by market participants to place bets on the Fed's rate-policy outlook, on Monday showed a roughly 63% chance that the central bank will raise interest rates again by December, according to CME Group data, up from 41% a week ago.

At 0350 GMT, USD/JPY was 111.52-53, EUR/USD was 1.1964-67 and GBP/USD was 1.3512-14.

Bonds:

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The yield on the 10-year Treasury note climbed to 2.23% Monday, a 2 basis point rise, closing at the highest yield in a month.

There was little new economic news to spark the increase. The biggest inflence seems to be Bank of England's Mark Carney commenting in a speech that Brexit could lead to higher inflation by driving up labor costs since there would be a shortage of migrant labor.

The benchmark Treasury yield was as low as 2.04% two weeks ago. The last time the yield was at 2.23% was August 16.

But Ian Lyngen and Aaron Kohli of BMO Capital Markets see the move more as positioning ahead of the Fed's meeting.

"Treasuries had little to trade on in the session in terms of geopolitics and we're certainly reticent to take a 2.5bp selloff in Treasuries as a sea-change in sentiment. Rather, we see it as more of a consolidation pattern ahead of the Fed, in a day that sported volumes at 36% of the 10-day averages."

Yields of Portugal's bonds fell Monday after an upgrade to investment grade late Friday by S&P, which raised its rating to investment grade--triple-B-minus from double-B- plus.

The yield of the 10-year benchmark bond fell to 2.44% from 2.8% Friday and 4.29% in March this year.

A top European Central Bank official said Monday that banking rules shouldn't be so detailed that they box in supervisors or encourage banks to move to a friendlier jurisdiction.

Sabine Lautenschlaeger, Vice Chair of the ECB's supervisory board, said in a speech in Basel that rather than having "overly detailed rules," there should be "a strong basic set of rules that allows supervisors some discretion."

She said that if the rulebook became "too extensive and too detailed, supervision turns into a simple box-ticking exercise."

She said that a set of rules that's too detailed wouldn't allow supervisors "to react quickly to newly emerging risks in an ever-changing banking sector. They would be walled in by rules that were devised to cover every possible situation but, in reality, were outdated right from the start."

Energy:

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Oil futures were little changed in Asia after scant movement during Monday's global session.

The lack of price action hints that traders aren't willing to do much ahead of Friday's gathering involving OPEC and non-OPEC countries regarding their ongoing production-cap deal. The agreement, in place since January, has done little to cut into much-larger-than-average global inventories.

Of late, more focus has been put on how much oil the parties are exporting, not their output. What is said and agreed to be done on outbound shipments could be the most-important thing for the market.

At 0143 GMT, October Nymex crude was up 11 cents at $50.02/barrel and November Brent was 8 cents higher at $55.56.

Metals:

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London spot gold edged higher in Asia after sliding for five consecutive sessions and is hovering just above a key support level of $1,300 per troy ounce.

Investors are focused on this week's Fed meeting as well as any statements on North Korea from a United Nations annual general meeting. At 0219 GMT, the precious metal was up 0.1% at $1,307.02/troy ounce.

Write to paul.larkins@wsj.com

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September 19, 2017 00:12 ET (04:12 GMT)