European shares ended a three-day rally and oil fell on Tuesday as investors feared the recent gains built on anticipation of new stimulus measures from central banks in the United States and Europe had been overdone.
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Speculation had centred on hopes the European Central Bank would announce a resumption of its bond buying programme at a meeting on Thursday to force down rising Spanish and Italian borrowing costs, despite German opposition to the move.
Markets had also pinned hopes on the Federal Reserve, which begins a two-day rate setting meeting later, succumbing to renewed pressure to boost slowing growth, though many economists do not expect further easing measures until September.
"The markets have run ahead of themselves. And I think certainly the ECB and the Federal Reserve will hold back from pumping in more money at this point in time," said Manoj Ladwa, head of trading at TJ Markets.
"If we see economic numbers worsening over the next few months or so, then it's likely they'll act, but they want to keep their powder dry for the time being," he said.
European shares, which are heading for their best month since October after soaring more than 5 percent in the last three sessions, stopped in their tracks, with the FTSE Eurofirst 300 index flat at 1,072.84 points in early trading.
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"Today will probably be a quiet last day of the month. Everybody is waiting for Thursday to see if (ECB President Mario) Draghi can deliver," said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets.
"He'd better pull a big rabbit out of his hat."
Investors were also given pause by weaker than expected earnings from several major banks and oil giant BP.
Deutsche Bank said its second-quarter profit had been badly affected by the euro zone debt crisis, dropping 63 percent to 357 million euros ($437 million) in the second quarter from a year earlier.
"The European sovereign debt crisis continues to weigh on investor confidence and client activity across the bank," Deutsche Bank's co-Chief Executives Anshu Jain and Juergen Fitschen said in a statement.
The earnings season has proved a damp squib for many European companies, reflecting the harsh economic environment.
Not including Tuesday's results, nearly half the companies due to report earnings have done so, 47 percent have missed forecasts, with second-quarter year-on-year growth expected to have contracted by more than 20 percent once all companies have released their results.
Meanwhile, the euro was capped by growing caution ahead of the Fed and ECB meetings, trading little changed at $1.2267 and below its high of $1.2390 hit on Friday.
The safe-haven German bond market reflected the growing sense that whatever ECB President Mario Draghi says at the bank's policymaking meeting is likely to disappoint markets looking for meat on the bones of his pledge to defend the euro.
Draghi said last week the central bank would do all that was necessary to protect the euro and ensure its easier monetary policy was reflected across the 17-member currency bloc, which many interpreted as signalling imminent policy action.
German 10-year cash yields were down 1.5 basis points at 1.355 percent.
Commodity markets are increasingly concerned about the health of the global economy as Europe's sovereign debt crisis, a slowing China and sluggish activity in the United States weigh on demand.
Major Asian exporters Japan, South Korea and Taiwan added to the deepening signs of economic stress on Tuesday.
A purchasing managers' report suggested Japan's factory sector is shrinking at its fastest pace since last year's earthquake, and industrial output in South Korea fell four times further than expected.
Taiwan sliced a full percentage point off its official forecast for 2012 economic growth, the seventh downgrade since last August.
Brent crude slipped under $106 per barrel to trade around $105.61, down 0.6 percent. Brent has also had a strong July, rising 8 percent for its biggest monthly gain since February.
Spot gold was little changed at $1,621.04 an ounce with prices on track for a 1.5 percent gain this month, its second straight monthly rise.
"Gold may come under some pressure in the run-up to this week's central bank meetings, with the possibility of a dip below $1,610, but direction will depend almost entirely on policy decisions," ANZ Bank said in a research note.