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Steady growth signs lift European stocks and bonds

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[May 22, 2014]  By John Geddie

 LONDON, date (Reuters) - European stocks and government bonds rose on Thursday buoyed by another month of private sector growth, firmer Chinese data and signs the U.S. Fed will maintain some monetary support for the world's largest economy.

An unexpected pickup in Europe's service industry was offset by underwhelming factory activity, but was enough to show that the euro zone's fragile recovery has some traction.

Early readings from Germany, the bloc's industrial heartland, set a strong tone while France remained the laggard.

"This doesn't change the picture of the euro zone having one of its best growth spells in the past three years. It's broad-based, with the one exception being France," said Rob Dobson, senior economist at survey compiler Markit.

Riskier assets were in vogue after manufacturing data showed some signs of the economy stabilizing in China. Meanwhile, minutes from the U.S. Federal Reserve's last meeting showed it was in no rush to raise interest rates.

European stocks <.FTEU3> rose 0.2 percent, with the main bourses in London <.FTSE>, Frankfurt <.GDAXI> rising 0.3 percent respectively, and Paris <.FCHI> up 0.1 percent.
 


Government bond yields also dipped, with expectations of further monetary easing from the European Central Bank supporting bond prices and allaying trepidation about EU elections.

The first polls for the European Union parliament since the bloc's debt crisis blew up open on Thursday, and an expected rise in eurosceptic parties threatens to destabilize some governments or sway them to delay any painful economic reforms.

Spanish and Italian 10-year yields were both 2 basis points lower at 3.00 and 3.18 percent, respectively, while German Bunds dipped 1 bps to 1.37 percent.

REVIVING MARKETS

The ECB has already strongly hinted it will cut rates at its June policy meeting, moving the deposit rate into unprecedented negative territory.

"If banks have to pay interest on the money they park in the euro system, this could revive the money market between banks, among others, and therefore also stimulate lending to businesses," said ECB Governing Council member Jens Weidmann.

Targeted measures aimed at boosting lending to small- and mid-sized firms program and a program of asset purchases, known as quantitative easing, has also been mooted.

As well as nurturing growth, the bank wants to stave off deflation and cool a stubbornly strong euro. The euro was back under $1.37 on Thursday, towards the lower end of a very tight range it has held in all week.

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LOSING APPEAL

Sterling fell against the dollar and the euro on Thursday after UK data showed a bigger-than-expected fiscal deficit, prompting some investors to take profits in the pound's recent rally to 5-1/2 year highs. <GBP/>

Markets looking for the Bank of England to raise rates early next year, and a surge in retail sales underlining the strength of the UK's recovery, is keeping the pound firm.

Elsewhere, the yen eased versus the dollar on Thursday and edged away from a 3 1/2-month high.

The yen has risen in recent weeks, partly because speculation has receded that the Bank of Japan will ramp up monetary stimulus.

One focal point for the yen is whether Japanese investors will step up their investment in higher-yielding overseas assets, at a time when domestic bond yields have been held low by the BOJ's massive monetary stimulus.

In a sign of such yield-seeking behavior by Japanese investors, Japan Post Insurance is investing more in Japanese stocks and foreign bonds, according to disclosures and a person with knowledge of the investment strategy.

(Editing by Larry King/Ruth Pitchford) nL6N0O646K

[ 2014 Thomson Reuters. All rights reserved.]

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