Stocks down amid UK rate decision, debt jitters

[February 10, 2011]  LONDON (AP) -- Stocks fell Thursday as Wall Street's recent rally ran out of steam and investors in Britain prepared for an interest rate decision from the Bank of England. The euro, meanwhile, was shaken by renewed jitters in Europe's debt markets, where Portugal's borrowing costs spiked to a new euro-era high.

The main scheduled event of the day will be the Bank of England's interest rate decision. Though the markets are pricing in only a one in five chance of a rate hike, the fact that it is being openly discussed has given the British pound a boost, particularly against the dollar.

"The more hawkish tone from some members has led the market to factor in a small probability of a rate rise," said Ruslan Bikbov, a rates strategist at Bank of America Merrill Lynch.

The Bank of England usually says little after its rate verdict, but Bikbov noted there's a chance the statement may be more detailed today given the recent turnaround in expectations in the markets.

Despite recent figures showing that the British economy shrank by 0.5 percent in the final three months of 2010, there are worries within the rate-setting Monetary Policy Committee that inflation is getting too high due to sharp rises in energy and commodity costs -- in December, the annual rate of inflation spiked to 3.7 percent, way ahead of the Bank's target of 2 percent.

The concern is that high inflation may become embedded in the economy if workers look to match price rises in their pay awards. At last month's meeting two of the nine rate-setters voted for the benchmark rate to rise by a quarter of a percentage point to 0.75 percent. Three more member votes for a rate hike would push the decision through.

The consensus, though, is that the central bank will keep borrowing costs unchanged, partly because next week's updated quarterly economic forecasts from the Bank are likely to continue to point to inflation falling back towards target over the medium-term.

"It would represent a risky call to tighten policy so soon after a contraction in economic activity without assessing incoming hard economic data which would provide more concrete evidence of the strength of the rebound in economic activity in the first quarter," said Lee Hardman, an analyst at the Bank of Tokyo-Mitsubishi UFJ.

Ahead of the meeting, the pound was 0.2 percent lower on the day at $1.6062 while the FTSE 100 index of leading British shares was down 0.7 percent at 6,008.

Meanwhile, the euro, which has recently been buoyed by talk of an earlier than expected interest rate increase from the European Central Bank, was hurt by renewed worries about high debt in countries like Portugal.

Despite recent hopes for a swift resolution to the debt crisis, bond yields rose again Thursday, particularly in Portugal, where the 10-year yield hit a new euro-era record high. The jitters caused the 17-nation euro to fall 0.6 percent to $1.3642.

Elsewhere in Europe, Germany's DAX was 0.6 percent lower at 7,276.44 despite initial optimism over a possible merger between NYSE Euronext Inc. and Deutsche Boerse, owner of the Frankfurt stock exchange.

Meanwhile the CAC-40 in Paris fell 1.1 percent to 4,047.

The declines in Europe follow a subdued close on Wall Street following a long stretch of gains across the board.

"The big run up that we've seen of late could now be poised to turn into a phase of consolidation," said Chris Weston, institutional trader at IG Markets.

U.S. stocks were heading for a lower opening -- Dow futures were down 0.5 percent to 12,149 while the broader Standard & Poor's 500 futures fell 0.6 percent to 1,311.

The main piece of economic data in the U.S. will be the weekly jobless claims figures, which are expected to have fallen around 5,000 to 410,000 last week.

Earlier in Asia, Japan's Nikkei 225 stock average slipped 0.1 percent to 10,605.65 as investors shied away from big moves ahead of a long weekend, while Hong Kong's Hang Seng index slid 2 percent to 22,708.62 -- its first close below 23,000 this year -- as a fall in oil prices hurt mainland China energy shares. South Korea's Kospi slid 1.8 percent to 2,008.50,

As in Europe, inflation remained high on Asia's worry list two days after China's central bank hiked interest rates for the second time in little over a month to tamp down stubborn inflation. Investors worry that could slow economic growth elsewhere given China's increasingly important role in the global economy.

Bucking the trend was China, where investors snapped up bargains in banks and property shares following a selloff that was sparked by China's interest rate hike. The benchmark Shanghai Composite shot up 1.6 percent to 2,818.16 and the Shenzhen Composite Index for China's smaller market surged 2.9 percent to 1,220.58.

The decline in investors' appetite for risk gave the dollar some support after it fell Wednesday in the wake of comments from Federal Reserve chairman Ben Bernanke.

Addressing lawmakers, Bernanke gave few indications that he was thinking about tightening U.S. monetary policy anytime soon.

Meanwhile, oil prices continued to drift lower as tensions in Egypt appeared to ease further.

Benchmark crude for March delivery was down 62 cents at $86.09 on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

Pamela Sampson in Bangkok contributed to this report.

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