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Europe Retreat With Dollar as Japanese Bonds Decline

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European stocks declined for a second day and dollar weakened as oil traded near $40 a barrel. Japanese 10-year bond yields rose to the highest since March before the government announces details of its fiscal stimulus plans.

The Stoxx Europe 600 Index slipped 0.6 percent. Japanese shares fell the most in almost four weeks to lead a slump in Asian equities, while energy companies retreated after U.S. oil descended into a bear market on Monday. Hong Kong’s market was shuttered by a typhoon. Yields on Japan’s 10-year debt climbed seven basis points to minus 0.07 percent, and the yen swung to an advance. Copper led gains by industrial metals.

Oil has slumped more than 20 percent from a peak reached in June, with Saudi Arabia cutting crude prices to Asia and further increases in U.S. drilling rigs sparking Monday’s 3.7 percent tumble. Japan’s government is due to unveil details of its 28 trillion yen ($273 billion) fiscal stimulus package Tuesday, as investors continue to mull the outlook for global central bank policies. The Reserve Bank of Australia lowered its benchmark lending rate to a record 1.5 percent at a meeting Tuesday in a decision predicted by 20 of 25 economists.

Crude’s decline “will probably weigh on sentiment a little bit and we may see some risk-off moves associated with that,” James Woods, a strategist at Rivkin Securities in Sydney, said by phone. “We’ll have an update from Shinzo Abe in Japan today, just running through the measures of the 28 trillion yen stimulus package. It’s really what’s going to dictate risk sentiment.”

Stocks

Banks and commodity producers led declines on the Stoxx 600, which extended Monday’s 0.6 percent decline. Benchmark gauges in the U.K., France and Italy all fell at least 0.3 percent.

S&P 500 Index futures added 0.2 percent to 2,168.90 after the underlying equity measure slipped 0.1 percent on Monday.

The MSCI Asia Pacific Index snapped a six-day climb, slipping 0.8 percent. Japan’s Topix index retreated 1.6 percent. Australia’s S&P/ASX 200 Index dropped 0.8 percent, while the Shanghai Composite Index gained 0.6 percent.

Japan’s government is set to announce 4.6 trillion yen ($45 billion) in extra spending for the current fiscal year, according to a draft of the plan being discussed by ruling party lawmakers ahead of a cabinet meeting later Tuesday. The government and the central bank have faced pressure to react after the yen’s 17 percent surge this year exacerbated concerns that inflation is sagging and that the so-called Abenomics program is losing ground.

Currencies

The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 peers, fell for the fifth time in six days. The yen was little changed at 102.41 per dollar ahead of the stimulus announcement, while the euro gained 0.3 percent.

The Australian dollar advanced 0.2 percent to 75.48 U.S. cents, reversing earlier declines. While Australia’s economy has grown faster than the central bank predicted, core inflation and wage growth are both at record lows.

The cut reflects that “inflation is likely to stay low for an extended period and the labor market has lost momentum this year,” Felicity Emmett, head of Australian economics at Australia & New Zealand Banking Group Ltd., said before the announcement.

Malaysia’s ringgit slipped amid oil’s retreat, weakening 0.8 percent following Monday’s 1.2 percent jump.

Bonds

Pacific Investment Management Co. says a record-setting rally in long-term Japanese government bonds has likely run its course because the central bank has pushed monetary policy as far as it can.

“We have probably seen the low of the yield of the super long JGBs,” Tomoya Masanao, Pimco’s head of portfolio management in Japan, wrote in an e-mail Monday. “The BOJ hit its limit,” he wrote in a report on the company’s website last week.

Australia’s 10-year bond yield fell 5.5 basis points to an unprecedented 1.823 percent.

Ten-year Treasuries yielded 1.54 percent following a seven basis-point increase last session.

Commodities

West Texas Intermediate crude climbed 0.6 percent to $40.29 a barrel after sliding to its lowest settlement price since April 18 on Monday. Futures have retreated 22 percent from a peak reached in June, meeting the common definition of a bear market.

While American crude and gasoline inventories are forecast to have declined last week, they’ll likely remain around the highest seasonal level in at least two decades. Nigeria has also resumed payments to former militants as the government seeks to establish a cease-fire after attacks cut the country’s oil output to the least since 1989.

Copper advanced 0.3 percent, while aluminum gained 0.1 percent and nickel rallied 0.8 percent.

Source:Bloomberg