Egyptian clashes keep market sentiment in check

[February 03, 2011]  LONDON (AP) -- Violent clashes in Egypt between pro- and anti-government demonstrators kept sentiment in financial markets in check on Thursday, ahead of the monthly interest rate decision from the European Central Bank.

Traders are monitoring the situation in Cairo as the Egyptian army moves to end the violence after standing by this week as the two sides battled with rocks, sticks, bottles and firebombs.

Though the market impact of Egypt's turmoil has diminished as the week progressed, it has fueled uncertainty.

That's evident in the oil markets, where traders worry oil-producing countries could be affected. A barrel of Brent crude in London is now trading just shy of $103, while the benchmark New York equivalent is around $11 lower at $91.54. Both are trading at their highest levels since 2008.

Sebastian Barbe, an analyst at Credit Agricole, said the threat of regional contagion "remains significant" and noted the sharp increase in the cost of insuring against a Saudi Arabian default.

"Mubarak's refusal to step down before the planned presidential election in September will likely fuel the protesters' anger and the next few days are unlikely to see a moderation of the conflict," Barbe said.

Against that backdrop, stocks have faltered.

In Europe, the FTSE 100 index of leading British shares was down 0.4 percent at 5,978 while Germany's DAX fell 0.1 percent to 7,175. The CAC-40 underperformed its peers, trading 1.1 percent lower at 4,023.

Wall Street was also poised for a sluggish opening -- Dow futures were up just 10 points at 11,995 while the broader Standard & Poor's 500 futures rose less than a point to 1,300.40.

While keeping one eye on developments in Egypt, investors also have to monitor a heavy load of economic news this week, culminating in Friday's monthly U.S. nonfarm payrolls data for January.

In the U.S., the economic data will also include weekly jobless claims figures and the monthly services survey from the Institute for Supply Management. On the corporate side, Dow Chemical Co., MasterCard Inc., and Merck & Co. were among those scheduled to release quarterly financial results.

However, the main point of interest Thursday could be the monthly press conference from European Central Bank President Jean-Claude Trichet. Though the bank is expected to keep its main interest rate unchanged at the record low of 1 percent, investors will be keen to see if Trichet warns about inflation risks.

Figures earlier this week showed that inflation in the 17 countries that use the euro climbed further in January to 2.4 percent. That's above the central bank's target of keeping inflation "close to, but below" 2 percent.

"Trichet is due to retire from the ECB at the end of October and he will likely want to secure his legacy as an inflation-vigilant central banker keen to preserve central bank independence," said Neil MacKinnon, global macro strategist at VTB Capital.

Ahead of the meeting, the euro was trading modestly lower following a recent rally to near three-month highs. Europe's single currency has been buoyant since Trichet's last post-meeting press conference, when he toughened up his rhetoric against inflation.

By late morning London time, the euro was trading 0.2 percent lower at $1.3777.

The euro has also been buoyed recently by hopes that EU policymakers have finally got a handle on a debt crisis that has already pushed Greece and Ireland into seeking bailouts.

There are hopes that a meeting of EU leaders Friday will provide confirmation of that view. The expectations are Germany is preparing to table a grand bargain that will see it pump in more cash into the eurozone's more indebted economies in return for stricter budgetary controls.

"Although a detailed and comprehensive policy solution might have to wait until the coming months, the broad outline of a policy solution, including debt restructuring for some of the peripherals, is likely alongside German insistence on a framework of strict fiscal policy objectives for the EU economies," VTB Capital's MacKinnon said.

Earlier, trading in Asia was muted due to the Lunar New Year holidays with markets closed in South Korea, Hong Kong, mainland China, Taiwan, Singapore, Malaysia and Indonesia.

The Nikkei 225 stock average closed 0.3 percent lower at 10,431.36 while Australia's S&P/ASX 200 advanced 0.5 percent to 4,817.20. Australian insurers jumped amid relief that Cyclone Yasi -- among the most powerful storms to ever hit the country -- appeared to have caused less destruction along the northeast coast than anticipated. Both Insurance Australia Group Ltd. and Suncorp Group Ltd. rose 3 percent.

[Associated Press; By PAN PYLAS]

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