LONDON, (Reuters) -
European shares dipped on Tuesday and the euro held near
3 1/2-month lows against the dollar after a fall in euro
zone inflation cemented the case for the European
Central Bank to ease monetary policy later this week.
The pan-European FTSE Eurofirst 300 .FTEU3 equity index was down 0.3
percent at 0930 GMT, barely reacting to the data that showed annual
consumer price inflation unexpectedly slowed to 0.5 percent in May.
The ECB, which targets inflation of close to 2 percent, meets on
Thursday and is widely expected to cut interest rates, including
lowering the rate that banks are charged for depositing funds with
the central bank to below zero.
The euro briefly rose after the numbers, reflecting relief that
price growth had not decelerated even further, while German
government bond futures fell.
"Today's inflation numbers underscore the need for the ECB to act.
The ECB has consistently underestimated the deflationary forces
threatening Europe and now is the time for unconventional monetary
policy," said Dominic Rossi, Global Chief Investment Officer at
Fidelity Worldwide Investment.
While recent data pointing to a weaker-than-expected economic
recovery have weighed on stocks, the prospect of ECB intervention
has offered some support.
However, expectations of lower euro zone rates, and recent upbeat
U.S. economic data, have combined to push the euro to its weakest
against the dollar since mid-February.
The single currency EUR= was steady at $1.3605, all but flat on the
day and not far from a low of $1.3586 hit last week.
The dollar index .DXY, which measures the greenback against a basket
of currencies, edged down but was close to Monday's four-month high.
The dollar stood at 102.40 yen, having earlier hit 102.49, its
strongest in more than a month.
German 10-year government bond yields DE10YT=TWEB, which hit
12-month lows last week, rose 3.1 basis points to 1.34 percent. Bund
futures FGBLc1 declined. Some traders said the weak inflation data
was already priced into the market and prompted investors to book
profits after a recent rally.
"That number was if anything bond-friendly. We expect the Bund to
regain its momentum and start rallying again ahead of Thursday's ECB
meeting," one trader said.
U.S. 10-year Treasury yields US10YT=RR rose on Monday to 2.54
percent after the Institute of Supply Management showed U.S.
manufacturing activity accelerated in May. The ISM data helped push
U.S. stocks higher, with the Dow Jones average .DJI and S&P 500
index closing at record highs.
The U.S. numbers and Chinese data showing factory and service-sector
performance had their best showings in months in May helped push
Asian shares higher on Tuesday.
Japan's Nikkei .N225 hit a two-month high, further boosted by talk
of public pension funds increasing their assets allocated to
domestic shares. MSCI's broadest index of Asia-Pacific shares
outside Japan .MIAPJ0000PUS rose 0.4 percent, nearing a one-year
high hit last week.
Emerging markets stayed broadly rangebound. Emerging dollar bond
spreads versus Treasuries stood at 288 basis points 11EML, their
tightest in 15 months. Emerging stocks rose 0.4 percent .MSCIEF,
just off recent 6-1/2 month highs
Higher U.S. and Asian shares helped steady gold after a five-day
losing streak, though the metal was still near a four-month low XAU=
at $1,246 an ounce.
Brent crude LCOc1 slipped towards $108 a barrel, reflecting weak
European demand, although the Chinese data kept a floor under
(Additiional reporting by Jamie McGeever and Sujata Rao in London,
Hideyuki Sano in Tokyo; Editing by Janet Lawrence)