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GLOBAL MARKETS-Euro sags ahead of inflation test, Ukraine nerves weigh

Source: Reuters - Fri, 29 Aug 2014 08:43 GMT
Author: Reuters
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* Euro zone inflation data, due at 0900 GMT, is focal point * Dollar edges up against yen after weak Japanese data * Share markets weak as Russia-Ukraine tensions swirl * German Bunds at record lows, money market rates go sub-zero By Marc Jones LONDON, Aug 29 (Reuters) - The euro was near a year low and on course for a fourth week of falls on Friday ahead of what was expected to be another stodgy euro zone inflation reading, and as tensions with Russia over Ukraine kept the region on edge. Share markets in London, Frankfurt and Paris bounced 0.3-0.6 percent early on following a heavy selloff on Thursday and as investors readied for the 0900 GMT August inflation data. Economists polled by Reuters expect it to take another tick down to 0.3 percent, but it could easily be a shade lower and whatever the outcome, it is likely to stir bets the European Central Bank will need to take further support measures. Those expectations, plus worries that persistent tensions between Russia and Ukraine could damage the broader region's already-weak recovery, pulled the euro back to $1.3173 and kept safe-haven German bonds in high demand. "What is more important for the ECB is inflation expectations and what is worrying for them is that they have been going down," said Philippe Gudin de Vallerin head of European research at Barclays. "They are clearly more nervous now," he added, though he doubted major changes would come at next week's ECB meeting. New action is unlikely though not impossible, according to ECB sources who spoke to Reuters this week. But together with updated projections from ECB staff, the inflation data is likely to lead to a lively discussion next Thursday about whether the bank should accelerate existing policy measures because of the danger of deflation. Overnight, euro zone money market rates dropped into negative territory for the first time ever. That essentially means banks are now paying to lend to each other, and it reflects expectations for a long period of cheap ECB money. German Finance Minister Wolfgang Schaeuble warned on Friday, however, that the ECB has run out of tools to fight deflation, after he on Thursday backed French President Francois Hollande's calls for greater government investment to boost growth. Front-running the euro inflation figures, French data showed producer prices fell 0.3 percent month-on-month in July and 0.6 percent year-on-year. It has a host of reform measures planned for September likely to push inflation even lower. RUSSIAN BEARS Asian shares had fallen earlier, pulling back from a more than six-year high touched this week, after flaring Ukraine tensions spoiled investor risk appetite. The rouble was a new all-time low versus the dollar as trading settled in Moscow and as Russian stocks steadied after a 3.5 percent fall this week. Pro-Russia rebels fighting in Ukraine said on Friday they would comply with a request from the Kremlin and open up a 'humanitarian corridor' to allow the withdrawal of Ukrainian troops they have encircled. It was not clear how the government in Kiev would react to the offer, but the first word from the Ukrainian military was negative. It said in a statement that the offer showed that "these people (the separatists) are led and controlled directly from the Kremlin". MSCI's broadest index of Asia-Pacific shares outside Japan was down about 0.2 percent and Japan's Nikkei stock average shed 0.2 percent after a spate of weak Japan data. The Nikkei was also down for the week, bringing its monthly loss to about 1.3 percent. The dollar edged up to 103.83 yen, below a seven-month high of 104.49 touched earlier this week. Spot gold was steady on the day at $1,288.70 an ounce after rising for the third straight session against a backdrop of Ukraine tension and ECB easing bets. It was on track for its first monthly gain since June. Brent crude added about 0.3 percent to $102.74 a barrel, but was on track for its second monthly loss as ample supply and softening demand in Europe and China outweighed geopolitical concerns. (Reporting by Marc Jones, editing by John Stonestreet)

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