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GLOBAL MARKETS-European markets rise, side stepping Asian jitters

Source: Reuters - Tue, 7 Jan 2014 13:37 GMT
Author: Reuters
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* European shares rebound, euro gains

* Wall Street expected to rise, break 3-day slide

* Bonds make ground after soft U.S. data

* Gold holds for sixth day of gains, oil edges back up

By Marc Jones

LONDON, Jan 7 (Reuters) - European shares and the euro clawed higher on Tuesday, as euro zone economic and inflation data held up better than some had expected and the region's banks began offloading funds stockpiled as a year-end precaution.

The moves meant Europe side-stepped the latest wave of Asian risk aversion that had pushed stocks there to their lowest in almost four months and kept a number of key emerging currencies in the firing line.

Wall Street was also expected to start higher after a three-day run of falls, though the mood was still expected to be cautious ahead of Wednesday's minutes from the Federal Reserve's December meeting and jobs data on Friday.

European markets had opened tentatively on the back of the Asian weakness but equities, bonds, the euro and oil were all driving higher by the time U.S. trading neared.

Top euro zone stocks were enjoying their best day of 2014 so far, boosted by strength in the region's periphery and better-than-expected unemployment and consumer spending figures from powerhouse Germany.

Spain's government borrowing costs hit their lowest since 2009, while the euro also rose as euro zone inflation remained clear of a low in October that prompted the European Central Bank - which meets on Thursday - to suddenly cut rates in November.

Inflation dipped by a tenth to 0.8 percent, well below the central bank's preferred level of just under 2 percent, but Vasileios Gkionakis, head of FX strategy at UniCredit, had been concerned it could have been worse.

"Yesterday's (inflation) number out of Germany had worried me a bit, so I think the fact that we got a reading that was pretty much in line with consensus was a bit of a relief."

The euro got an additional lift as banks also handed back much of the precautionary ECB funding they had stockpiled ahead of the traditionally tense year-end period.

Spanish and Portuguese shares both jumped to their highest since mid-2011 and Portugal's borrowing costs hit a seven-month low, as bumper interest for Ireland's first major bond sale since its EU/IMF bailout boosted Lisbon's hopes of following in its footsteps.

Ireland saw its borrowing costs drop to an eight-year low after strong demand for its debt. It is boosting sentiment across the euro zone periphery and pushing down yields, which could make it easier for Lisbon to exit its bailout.

"We have started the year on a weak footing and that is probably some payback due to the strong performance we have had in December, but overall I don't see any significant reason for investors to start becoming bearish on equities," said Gkionakis.

ASIA TURBULENCE

It had been a different day for Asian markets as the troubles that have buffeted the region since the start of the year continued.

Asian shares suffered a fourth day of falls, led by a 0.6 percent drop on Tokyo's Nikkei, while the Indonesian rupiah and Philippine peso led slides among emerging currencies.

Closer to Europe, Turkey also remained in the firing line. The lira was pinned near the previous day's record low, while two-year bond yields held above 10 percent and stocks sagged to a new four-month low.

"(Current) factors are not incompatible with a 'BBB-' rating, but they have the capacity to weaken sovereign creditworthiness," warned rating agency Fitch, referring to a corruption scandal in Turkey which has hurt investor sentiment.

In the currency market, reduced risk appetite led to a gentle climb in the dollar, despite Monday's drop in benchmark U.S. government bond yields.

"With equities off and things just turning over a little bit in terms of the (global economic) data ... for choice, I am a little bit risk-off here," said National Australia Bank strategist Gavin Friend. "The problem is we have non-farm payrolls on Friday which is basically a coin-flip."

IRISH BONDS SMILING

Among commodities, the Asia jitters helped gold hold its ground at $1,238.20 an ounce and it looked to be heading for a sixth straight day of gains.

Having suffered its worst run in over three decades last year, bullion is currently one of 2014's best performing assets though many analysts doubt it can sustain the momentum if the U.S. Federal Reserve continues to scale back its money printing.

"We have been rather surprised by gold's resilience over the course of the last week, but suspect that its upside staying power will be limited," INTL FCStone analyst Edward Meir said.

The harsh Arctic snap hitting the United States also helped U.S. crude futures climb away from a one-month low to $107.37 a barrel with logic pointing to people cranking up the heating.

Violence in Iraq and the possibility of increased tensions ahead of parliamentary elections in April have also sparked concern about supply from the country, the second-largest Middle East oil producer.

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