GLOBAL MARKETS-Oil retreats on Saudi supply reassurance, Fed in limelight

* Oil steps back as Saudi says has restored supply
* Geopolitical tensions still support oil
* Investors expect Fed to cut rates by 25 basis points on
Wed
* U.S. repo squeeze makes Fed QE more likely - Gundlach
* European shares seen little changed
* Asian stock markets: https://tmsnrt.rs/2zpUAr4

By Hideyuki Sano
TOKYO, Sept 18 (Reuters) - Oil prices cooled on Wednesday as
Saudi Arabia said full oil production would be restored by
month's end while caution ahead of an expected U.S. interest
rate cut kept wider financial markets in tight ranges.
European shares are expected to tread water, with
pan-European Euro Stoxx 50 futures STXEc1 shedding 0.06%,
German DAX futures FDXc1 losing 0.1% and FTSE futures FFIc1
down 0.14%.
MSCI's broadest index of Asia-Pacific shares outside Japan
.MIAPJ0000PUS ticked up 0.14 % while Japan's Nikkei .N225
dipped 0.18% after 10 straight days of gains and China's
blue-chip share index .CSI300 rose 0.52%.
Wall Street shares inched up on Tuesday with the S&P 500
.SPX gaining 0.26%.
Brent crude LCOc1 futures dipped 0.26% to $64.38 a barrel,
having conceded about 65% of their gains made after the weekend
attack on Saudi Arabia's oil facilities.
U.S. West Texas Intermediate (WTI) crude CLc1 lost 0.5% to
$59.06 per barrel, paring back around half of its gains after
Saturday's attack.
Saudi Energy Minister Prince Abdulaziz bin Salman on Tuesday
sought to reassure markets, saying the kingdom would restore its
lost oil production by month-end having recovered supplies to
customers to the levels they were prior to weekend attacks.
"I would think a spike in oil prices will likely prove to be
short-term given that the global economy isn't doing too well,"
said Akira Takei, bond fund manager at Asset Management One.
Still, heightened geopolitical tensions underpinned oil as
well as some safe-haven assets such as U.S. bonds.
A U.S. official told Reuters on Tuesday the United States
believes the attacks originated in southwestern Iran, an
assessment that could further increase the rivalry between
Tehran and Riyadh.
Adding to uncertainties in the Middle East were exit polls
from Israel's election, which showed the race too close to call
suggesting Prime Minister Benjamin Netanyahu's fight for
political survival could drag on. Gold XAU= was mostly flat at $1,502.10, while the 10-year
U.S. Treasuries yield fell to 1.799% US10YT=RR , compared with
Friday's 1-1/2-month high of 1.908% ahead of the Fed's policy
announcement on Wednesday.
While a 25-basis point rate cut is seen as near-certain,
investors look to the statement and economic projections from
Fed policymakers, given signs of deep disagreements among them.
"Markets are currently almost pricing in three more rate
cuts by the end of next year, including one by the end of this
year, but the chances are that the Fed's stance will be more
hawkish than markets and we could see a rise in bond yields in
the near term," said Masahiko Loo, portfolio manager at Alliance
Bernstein.
The ongoing U.S.-China trade war has raised policymakers'
concerns about slowing factory output although resilient
domestic consumption has given hawks some reasons to worry about
cutting rates too hastily.
Possibly further complicating their discussions, short-term
U.S. interest rates shot up this week, with overnight repo rates
rising to 7%, due largely to seasonal factors such as huge
payments for taxes and bond supply.
That prompted the New York Fed to conduct its first repo
operation in more than a decade to inject funds to stressed
money markets. The New York Federal Reserve said late Tuesday it would
conduct a repurchase agreement operation early on Wednesday "in
order to help maintain the federal funds rate within the target
range of" 2.00% to 2.25%. Jeffrey Gundlach, chief executive of DoubleLine Capital,
said on Tuesday that the repo market squeeze makes it more
likely that the Federal Reserve will resume expansion of its
balance sheet "pretty soon." Also in focus is the Bank of Japan's policy meeting due
Thursday. While the latest Reuters poll suggests the BOJ will
keep its policy on hold, 28 of 41 economists expect it will ease
its policy this year and 13 believe it may surprise by taking
action at the Thursday meeting. In the currency market, the euro stood flat at $1.1064
EUR= after a 0.6% gain the previous day on
better-than-expected readings in Germany's ZEW survey on
investor confidence.
Sterling traded at $1.2483 GBP=D4 , down 0.1% so far on the
day, having hit a two-month high of $1.2528 as investors
reversed their bets against the currency on fear of a no-deal
Brexit at the end of next month.
The yen eased slightly to 108.21 yen JPY= , near a
1-1/2-month low of 108.37 touched on Tuesday.

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Bank excess reserves held at the Fed https://tmsnrt.rs/2BiDDzx
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(Editing by Sam Holmes and Jacqueline Wong)