European stocks drift ahead of bank statements

[March 04, 2010]  LONDON (AP) -- European stock markets fell modestly Thursday as investors awaited the latest policy statements from the European Central Bank and the Bank of England and digested the news that Greece is looking to raise euro5 billion ($6.8 billion) from bond markets to finance its debt.

In Europe, the FTSE 100 index of leading British shares was down 8.72 points, or 0.2 percent, at 5,524.49 while Germany's DAX fell 22.75 points, or 0.4 percent, to 5,795.13. The CAC-40 in France was 6.07 points, or 0.2 percent, lower at 3,836.45.

Though the European Central Bank and the Bank of England are expected to keep their main interest rates on hold at 1 percent and 0.5 percent, investors appear to be treading carefully ahead of their accompanying statements.

In particular, they will be interested to hear what European Central Bank president Jean-Claude Trichet says about the economic outlook for the 16-country eurozone and how monetary policy is being affected by the debt crisis afflicting Greece -- figures earlier confirmed that the eurozone economy grew by a tiny 0.1 percent in the last three months of 2009 as the recovery in Germany ground to a halt, Italy started contracting again and the Greek recession worsened.

Despite the anemic economic recovery in the eurozone, Trichet is expected to confirm that special lending measures to banks introduced during the financial crisis will continue to be scaled back.

Analysts think he will confirm that the upcoming auction of 6-month credits on March 31 will be the final operation and that the interest rate charged for shorter-term loans will be increased. The central bank introduced a range of cheap liquidity operations when the financial crisis first exploded to allow the commercial banks to have access to money at a time when the credit markets had seized up.

Regarding the Bank of England, investors will be looking to see if the rate-setting Monetary Policy Committee asks to have its financial asset program extended.

However, with inflation above the Bank's 2 percent target and economic growth higher than previously thought, most analysts doubt an extension will be asked for -- the Bank of England bought some 200 billion pounds worth of financial assets from the commercial banks, mainly bonds, to increase the money supply and get them lending again.

"This afternoon's session could be a volatile one, but until all the cards are on the table it seems that no one is willing to show their hand just yet," said Anthony Grech, market strategist at IG Index.

Greece also remains in focus after Greece's Public Debt agency chief said a new 10-year bond was oversubscribed. The government was seeking a maximum of euro5 billion but had bids for euro7 billion within an hour of the book opening.

The sale will be watched closely by financial markets to gauge the depth of Greece's debt crisis. The announcement of the issue comes a day after debt-ridden Greece detailed a whole new round of austerity measures, including salary cuts for civil servants, pension freezes and tax hikes on cigarettes, alcohol, luxury goods and gems.

The bond issue also comes a day before Greek Prime Minister George Papandreou meets with German Chancellor Angela Merkel.

Elsewhere, attention in the markets is slowly turning towards Friday's U.S. nonfarm payrolls report, which often sets the market tone for a while.

Wall Street was poised to open steady following a flat performance on Wednesday -- Dow futures were down 1 point at 10,386 while the broader Standard & Poor's 500 futures fell 0.5 point to 1,118.10.

Earlier, stock markets in Asia fell after four days of mostly solid gains.

Japan's Nikkei 225 stock average fell 107.42 points, or 1.1 percent, to 10,145.72.

Hong Kong's Hang Seng dropped 301.01, or 1.4 percent, to 20,575.78 and South Korea's index was down 4.24, or 0.3 percent, to 1,618.20. Shanghai's market dived 2.4 percent as investors took profits ahead of Friday's opening of the national legislature. Uncertainty surrounding new policies expected to be announced during the National People's Congress fostered caution.

Currency markets were largely flat with the euro down 0.1 percent at $1.3677 and the dollar down 0.1 percent at 88.39 yen. The pound hovered just above $1.50.

Meanwhile, oil prices eased modestly after a two-day jump fueled by growing investor optimism that global crude demand is recovering. The benchmark contract was changing hands at $80.52 a barrel, down 35 cents after climbing $1.19 overnight.

[Associated Press; By PAN PYLAS]

AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.

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