By John Geddie
LONDON (Reuters) - European stock markets stuttered and the euro clawed back some ground against the U.S. dollar on Tuesday as investors had second thoughts about sky-high expectations of European Central Bank easing this week.
Britain's FTSE 100 (FTSE) was one of only a couple of the region's bourses to show gains after the release of promising bank stress tests, with record low unemployment data from Germany feeding fears that ECB stimulus hopes could be overdone. (EU)
U.S. stocks were set to open up 0.3 percent (ESc1), building on Asian gains after tentative signs that a slowdown in China was stabilizing.
Europe's bond yields ticked higher and the single currency bounced off a 7-1/2-month low on concerns that the ECB may not deliver all the stimulus on Thursday that investors have come to expect.
Markets are already pricing in a deposit rate cut and an increase in the size, scope and length of the ECB's trillion-euro bond buying program. Analysts say it would be hard for ECB President Mario Draghi to surprise markets.
"The big question is if Draghi can surprise the markets, given that ECB by its own comments has contributed to quite stretched market expectations," SEB head of fixed income research, Jussi Hiljanen, said.
The FTSEurofirst 300 (FTEU3) was up slightly on the day, with the rally in the FTSE offsetting falls in Germany's DAX (GDAXI) and France's CAC 40 (FCHI).
European stocks failed to gain much sustained impetus from Chinese data which sent MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) up 1.8 percent.
China's official Purchasing Managers' Index reached a three-year low in November. But the private Caixin/Markit China Manufacturing PMI showed factory activity contracted at a slower pace than in October, fuelling hopes the economy may have been bolstered by government support.
In Europe's largest economy, Germany, there were further signs of a turnaround in fortunes, with unemployment dropping to the lowest level since reunification in 1990.
CMC Markets' Michael Hewson said that these sorts of signs of life in the euro zone economy could limit the aggressiveness of ECB stimulus.
"Quite simply there is a risk that market expectations of what the ECB will do this week are based on the premise of shock and awe, when in reality they could get something more akin to bubble and squeak," he said in a note to clients.
This was certainly the feeling among bond and currency investors, with German yields up for the second straight day, coming off a one-month low hit on Friday, and the euro rising to $1.0593
China's yuan was flat in onshore trading
The widely expected move was a milestone in China's integration into global finances and a nod of approval to the country's reforms.
The dollar index (DXY), which tracks the greenback against a basket of six major rival currencies, edged down to 100.00. That still left it within sight of the 100.39 the index hit in March, its highest for more than 12 years, on expectations Federal Reserve will raise U.S. interest rates later this month.
By contrast, the Reserve Bank of Australia held rates steady at 2 percent at its policy meeting. The Australian dollar rose about 0.7 percent after the decision, to $0.7277
Australian shares <.AJXO> rallied 1.9 percent, extending gains, after trade data showed Australia's economy gained last quarter from a rebound in resource exports.
U.S. crude oil prices regained some ground after volatile trading overnight, when they first rallied and then erased gains after a survey estimated higher OPEC output. U.S. crude (CLc1) added 0.5 percent to $41.88 a barrel.
Brent crude futures (LCOc1) were up 0.5 percent to $44.82.