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Banks boost Europe as shares start second half brightly

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[July 01, 2014] By Marc Jones

LONDON (Reuters) - European and Asian stocks started the second half of 2014 brightly on Tuesday, helped by upbeat Chinese data and bets that record low interest rates will remain in place for some time yet.

EU data - on Tuesday the euro zone Purchasing Managers' Index and unemployment figures - continued to point to a fragile recovery but there was relief among the region's banks <.SX7E> as France's largest, BNP Paribas, settled a U.S. sanctions probe.

Chinese factory PMIs earlier helped reinforce signs of stabilization in its giant economy, giving a lift to investors digesting a first half during which few of the main 2014 consensus calls proved to be right.

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 <.FTEU3> were up 0.5 percent by midday, led by BNP <BNPP.PA> which jumped 4 percent as it settled a $9 billion U.S. sanctions case, though worries about a number of Portuguese banks hit stocks there <.PSI20>.

Italian and Spanish bonds made ground as economists wagered the anaemic euro zone manufacturing figures and jobs data would be subdued enough to keep the European Central Bank - which meets on Thursday - thinking about easing policy.

Weak inflation numbers on Monday reinforced the ECB's unprecedented measures last month and though further policy moves are unlikely until late in the year, they could still come. [FRX/]

"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 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.

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

Having notched up their sixth straight quarter of gains on Monday, U.S. stocks were expected to follow Europe's upward trend when trading resumes. Asian shares <.MIAPJ0000PUS> had spent their day near recent three-year highs. Japan's Nikkei rose 1.3 percent.

AWAITING U.S. JOBS REPORT

As well as the ECB's monthly meeting, Thursday will include a U.S. employment report, expected to see another strong reading a day earlier than usual due to July 4 celebrations.

One big market bet for the first half was for a rise in the dollar on the view the Fed is inching towards its first post-crisis rate hike, but this predictions has fallen flat.

The dollar index hit a seven-week low of 79.759 on Monday and stood barely above that at 79.861 in Europe as the start of U.S. trading approached.

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Ten-year U.S. government bond yields - an important benchmark for the dollar and global borrowing costs - traded around 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.

In contrast to the struggling dollar, Britain's pound strained for its highest level in six years on bets of a rate hike this year. The euro was also firm just off a six-week high at $1.3681, giving ECB policymakers cause for frustration after their aggressive easing measures last month.

POLITICAL TENSIONS

Another of the assets continuing to defy gloomy bets at the start of the year was gold <XAU=> as heightened geopolitical tensions and the limp dollar kept it near at a 2-1/2-month high.

The first session of Iraq's new parliament - under pressure to name a government to keep the country from splitting apart - was adjourned without settling on a new speaker.

Ukraine was also threatening. President Petro Poroshenko said on Tuesday government forces would renew their offensive against rebels, hours after a ceasefire expired.

Brent crude dipped to $112.33 a barrel by 1100 GMT, after ending down 94 cents at its lowest since the rally spurred by the Iraqi crisis started on June 12. Government forces in Iraq appeared to be keeping Sunni militants away from major refineries in the country's south.
 


U.S. oil rose 35 cents to $105.72 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 and John Stonestreet)

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