By Marc Jones

LONDON (Reuters) - Weak European economic data sent the euro lower and sparked a bounce in bond and share markets on Wednesday, as investors also awaited results from tech darling Nvidia (NASDAQ:) later to see if the sector's lofty valuations still look justified.

The euro fell to a more than two-month low of just above $1.08 against the dollar and a 12-month low against the pound after survey data showed German and euro area business activity slumped in August. [FRX/]

It was the fastest contraction in German business activity in over three years and had traders scurrying to firm up bets that the European Central Bank could now pause what has been a record-breaking run of interest rate hikes.

That view that borrowing costs may finally be cresting helped lift the European share index as much as 0.5% and pushed Germany's 10-year government yield, the euro area benchmark, down to 2.546%, its lowest since Aug. 10. [GVD/EUR]

"The PMI suggests that it's back to the pre-summer narrative of lower rates," said Piet Christiansen, chief analyst at Danske Bank.

Christiansen added that euro zone inflation data due next week would still be key to the ECB's decision.

"There's many indicators that suggest that we could have had the last hike but if you just look at inflation, which is the (ECB's) key mandate... that is not a done deal," he added.

Traders scaled back their bets on a ECB September hike and now price in a roughly 40% chance of a 25 basis point move compared with more than 50% on Tuesday.

Overnight, Asian markets had seen more focus on the weakness in China's economy and yuan, as well some gloomy factory readings from Japan, which also left sentiment fragile.

Equity markets were in wait-and-see mode ahead of earnings later from chip giant Nvidia following its frenzied stock price rise this year on the back of the boom in artificial intelligence (AI).

Its shares hit an all-time high of $481.87 on Wall Street on Tuesday, with options data showing traders are expecting a larger-than-usual swing in shares after the quarterly results which will be published later.

Analysts expect the firm to forecast 110% growth in third-quarter revenue to $12.50 billion. Stuart Humphrey, an analyst at JPMorgan (NYSE:), said some are forecasting $14-15 billion.

"This kind of number feels a touch high to me, but if it sniffs this - one could argue that into this print, it doesn't matter if demand will eventually decline next year - (it) still will be re-rated higher," Humphrey said.

MSCI's broadest index of Asia-Pacific shares outside Japan had finished up 0.4%, although it was not far from a nine-month trough hit just two sessions ago. also rose 0.5%.

Data there showed factory activity shrank for a third straight month in August, offering the first glimpse into the health of global manufacturing this month. The United States will also report its flash PMI readings on Wednesday, which is likely to show the factory sector remained in contraction.

The benchmark 10-year Japanese government bond yield hit a new 9-1/2-year peak of 0.675%, as investors took the Bank of Japan's decision to refrain from intervening to buy bonds as a green light for further selling.

In China, blue chips failed to hold onto Tuesday's gains, falling 1.3%, while Hong Kong's held up better, up 0.3% after a 1% jump.

Iron ore prices rose 5% to a fresh two-year high on Wednesday, and coking coal and coke were up more than 3% in the absence of Chinese government directives to cut steel production.

Wall Street futures also pointed to a bounce having been pressured on Tuesday by higher bond yields, which hit 16-year highs. The Dow Jones fell 0.5%, the lost 0.3% and the added 0.1%.

Financial shares underperformed, with the S&P 500 banks sliding 2.4%, after S&P joined Moody's (NYSE:) to downgrade multiple regional U.S. lenders.

The weak euro zone data meant Treasury yields were also down. Ten-year yields eased to 4.26% in early European trading, after touching a 16-year high of 4.36% a session earlier.

A jump in Treasury issuance, Fitch's credit downgrade three weeks ago and concerns China will dump Treasuries to support the yuan have added to a sell-off as investors await the Fed's annual summit in Jackson Hole, Wyoming, later this week for more rate clues.

Comments from Richmond Fed President Thomas Barkin raised expectations that Chair Jerome Powell would deliver a hawkish message, after strong U.S. economic data makes the "re-acceleration scenario" possible.

In currency markets, moves away from the euro were largely muted ahead of Jackson Hole. The U.S. dollar was at a two month high of 103.8 against a basket of major currencies.

The yen hovered near a nine-month trough at 145.34, amid talks that Japan will only intervene in the market if the currency plunges past 150 to the dollar.

Oil prices were slightly lower. futures dropped 0.75% to $83.75 per barrel and U.S. West Texas Intermediate crude futures edged down to $79.14, while gold was 0.3% higher at $1,903 per ounce.