China data, Greek debt talks keep mood subdued

[February 02, 2015] By Lionel Laurent

LONDON (Reuters) - European shares stalled and core bond yields held near lows on Monday following disappointing data from China, while Greek markets were volatile as the government pursued efforts to reach a compromise with its creditors.

Data pointing to weak January growth in euro zone factory activity did little to brighten the mood after China's first contraction of the PMI gauge in nearly 2-1/2 years.

Some Greek bank stocks rebounded as much as 18 percent and yields fell as Greece's leftist government began its drive to persuade a skeptical Europe to accept a new debt agreement. Finance Minister Yanis Varoufakis met his British counterpart George Osborne on Monday.

While some analysts said the new Syriza government's pitch sounded less confrontational than before, big differences between Athens and its EU partners appeared to persist and the prospect of tough negotiations knocked markets in Spain and Italy, where anti-austerity parties have gained in popularity.

"(W)e do think that (a Greek euro zone) exit would generate heightened volatility and a higher risk premia in other European equity markets, particularly in the periphery," Goldman Sachs analysts wrote in a note.

"Our base case remains that, eventually, some accommodation will be found between the new Greek government and Greece's official creditors."

The pan-European FTSEurofirst 300 <.FTEU3> was down 0.5 percent at 7:41 a.m. ET, remaining in negative territory after data showed euro zone factory activity grew slightly last month as companies kept slashing prices - even as a weakened currency did little to help drive new orders from abroad.

U.S. stock index futures rose, meanwhile, indicating a modest rebound after a recent downward trend that culminated in January being the worst month for the Dow and S&P 500 in a year.

Spain was a notable outlier, with its benchmark IBEX index <.IBEX> down more than 1 percent despite Spain's manufacturing sector expanding in January after years of on-off recession.

On Saturday, tens of thousands marched in Madrid in the biggest show of support yet for Spanish anti-austerity party Podemos, whose policies have drawn comparisons with the Syriza party that now governs Greece.

"The situation in Greece seems manageable from an investor's point of view, given the size of the economy. But if the anti-austerity wave reaches Spain, that's another story," said Alexandre Baradez, chief market analyst at IG France. "That's why people are trimming exposure to Spain this morning, despite the relatively good PMI figures."

A raft of recent policy moves from central banks was still rippling through markets. Yields on some Danish bonds slipped after Denmark's central bank said a bond issuance program was being suspended - a move aimed at keeping the crown stable against the euro.

The Swiss franc hit a two-week low against the euro and the dollar on Monday, on talk that the Swiss National Bank was intervening to weaken the currency and on a report that it was targeting a new informal trading band.

Asian markets languished after downbeat Chinese factory sector data raised concerns about the world's second-largest economy. The unexpected contraction of the PMI gauge was the first in nearly 2-1/2 years, and firms see more gloom ahead.

The weak data led to a bounce in some commodities markets, with London copper rising on hopes for increased stimulus.

Crude oil prices also rose as investors shrugged off a U.S. refinery strike and focused on a falling U.S. rig count that signaled lower production down the line.

The rouble weakened, with market players also still reacting negatively to the Russian central bank's unexpected decision on Friday to cut rates.

(Reporting by Lionel Laurent; Additional reporting by Blaise Robinson and Anirban Nag; Editing by Toby Chopra; editing by John Stonestreet)

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