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European stocks get second half off to steady start

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[July 01, 2014]  By Marc Jones

LONDON (Reuters) - European and Asian stocks helped markets get the second half of the year off to steady start on Tuesday, helped by upbeat Chinese data and bets that record-low interest rates will remain in place for some time yet.

Investors were digesting updated euro zone Purchasing Managers' Index and unemployment figures after Chinese factory PMIs earlier had helped reinforce signs of stabilisation in its giant economy.

Markit's final euro zone manufacturing PMI fell to 51.8 in June from May's 52.2, its lowest since November, but it has now held above the 50 mark that separates growth from contraction for a full year.

European shares were also helped off the blocks by France's biggest bank BNP Paribas as it settled a $9 billion U.S. sanctions case, though worries over of a number of Portuguese banks hit stocks there.

Italian and Spanish bonds made ground too as economists wagered the anaemic euro zone manufacturing figures and jobs data would be subdued enough to keep the European Central Bank (ECB) thinking about easing policy.

Weak inflation numbers on Monday only served to reinforce the ECB's unprecedented policy measures last month.

"The ECB will certainly take this data into account and EMU inflation remains at a very low level and this rather supports the dovish tone of the ECB in general but not changing their view for now," DZ Bank strategist Christian Lenk said.

A string of fairly upbeat but minor U.S. economic figures published on Monday also did little to weaken expectations, rekindled after surprisingly weak first quarter growth data, that the U.S. Fed will also not be in any rush to raise rates.

Asian shares drifted around recent three-year highs overnight. Japan's Nikkei rose 1.3 percent.


San Francisco Fed President John Williams said on Monday the U.S. central bank will probably need to keep interest rates near zero for at least another year.

While this Thursday's U.S. employment report has potential to change that perception, investors for now are counting on an easy policy stance by the Fed, which undermines the attraction of dollar.

The dollar index hit a seven-week low of 79.759 on Monday and stood barely above that at 79.861 in early European trading. Meanwhile, 10-year U.S. government bond yields - an important benchmark for both the greenback and global borrowing costs - inched up to 2.55 percent.

"I think the big question for the second half of the year is when is this so-called dollar rally that we have been waiting 12, maybe even 24 months for is going to happen," CMC markets strategist Michael Hewson said.

With the dollar struggling, the euro hovered just off Monday's six-week high at $1.3681, giving ECB policy makers at Thursday's meeting cause for frustration. The euro is back to levels seen last month before it announced its aggressive easing measures.

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Japan's yen was in a similar position at 101.43 yen to the dollar.

It showed little reaction to mixed readings in the Bank of Japan's tankan corporate survey, while the Australian dollar <AUD=D4> inched towards a 2014 high after its central bank kept rates on hold and steered clear of talking down the currency.


Another of the assets continuing to defy gloomy bets at the start of the year was gold as heightened geopolitical tensions and the limp dollar lifted it to a 2-1/2-month high of $1,332.10 per ounce.

Newly elected Iraqi lawmakers convene on Tuesday, under pressure to name a unity government to keep the country from splitting apart.

Ukraine was also threatening. President Petro Poroshenko said on Tuesday government forces would renew their offensive against rebels, just hours after a ceasefire to allow for peace talks with the pro-Russian separatists had expired.

Still, oil prices eased from nine-month highs hit last month as government forces in Iraq appeared to be keeping Sunni militants away from major refineries in country's south.

Brent crude gained 14 cents to $112.50 a barrel by 0730 GMT, after ending down 94 cents at its lowest since the rally spurred by the Iraqi crisis started on June 12. U.S. oil rose 31 cents to $105.68 a barrel.

"We certainly need to keep an eye on Iraq and see what is happening in Ukraine. But overall economic data, including from the United States, seems to suggest the global economy is improving," OptionsXpress markets analyst Ben Le Brun said.

(Additional reporting by Hideyuki Sano in Tokyo; Editing by Louise Ireland)

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