US economy dogs stocks as euro rallies

[May 05, 2011]  LONDON (AP) -- Signs that the U.S. economy may be struggling kept stock markets in check Thursday, while the euro pushed up towards 18-month dollar highs ahead of a keenly awaited statement from the European Central Bank.

A weaker survey from the ADP private payrolls firm and a disappointing survey into the services sector from the Institute for Supply Management have dented investor sentiment in the run-up to Friday's closely watched U.S. payrolls data, which often set the stock market tone for a week or two.

"Ahead of tomorrow's US jobs data, the equity market is alert to possible disappointment in the light of recent soft business surveys," said Neil MacKinnon, global macro strategist at VTB Capital.

In Europe, the FTSE 100 index of leading British shares was down 0.1 percent at 5,978 while France's CAC-40 fell 0.4 percent at 4,028. Germany's DAX bucked the trend somewhat, rising 0.2 percent to 7,385.

U.S. stocks were poised for a fairly flat opening -- Dow futures were up 0.1 percent at 12,680 while the broader Standard & Poor's 500 futures were more or less unchanged at 1,343.

There's more U.S. economic data to come Thursday, including weekly jobless claims figures, but the main focus in the currency markets will be on what European Central Bank president Jean-Claude Trichet says in his monthly press conference after the bank's expected decision to keep its main interest rate unchanged at 1.25 percent.

Last month, the ECB raised rates for the first time in nearly three years and the markets are expecting more hikes over the coming months, possibly as soon as June. If Trichet says the bank is exercising "strong vigilance" over inflation, investors will take that as a hint that borrowing costs could rise next month -- in the past, those keywords have been used to predict a rate hike the following month.

"The 'will he?/won't he?' debate on whether he mentions the phrase "strong vigilance" is what market participants will be watching closely for to signal whether the ECB intends to take the rate hike step in June or July," said Derek Halpenny, European head of global currency research at The Bank of Tokyo-Mitsubishi UFJ.

The euro has gained strongly in recent months against the dollar as investors priced in the growing likelihood of interest rate increases from the ECB.

If the U.S. Federal Reserve were planning similar rate increases, then the impact in the euro/dollar exchange rate would not be as big. However, the Fed shows few signs yet of raising its super-low interest rates anytime soon.

By mid morning London time, the euro was up 0.4 percent at $1.4886, just shy of Wednesday's high of $1.4942, which was the highest level since December 2009.

Earlier in Asia, inflation worries remained a dominant theme in the region in a week that has already seen India's central bank lift interest rates and the People's Bank of China hint that it may do so again soon.

However, mainland Chinese shares edged higher as investors snapped up bargains following the Shanghai benchmark's biggest loss in more than 2 months the day before.

The benchmark Shanghai Composite Index gained 0.2 percent to 2,872.40, and the Shenzhen Composite Index gained 0.3 percent to 1,190.8.

Hong Kong's Hang Seng index dropped 0.2 percent to 23,261.61, but markets in South Korea and Japan were closed for holidays.

In the oil markets, benchmark crude was down 75 cents a barrel at $108.61. Oil prices have been on the retreat this week as investors have worried that slowing U.S. economic growth will undermine demand for crude.

[Associated Press; By PAN PYLAS]

Pamela Sampson in Bangkok contributed to this report.

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