Higher oil fails to lift stock but yen, low-risk debt in favor

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[February 03, 2016]  By Nigel Stephenson

LONDON (Reuters) - A rise in oil prices on Wednesday failed to lift European stocks, which instead sagged on weak earnings, prompting investors to seek safety in the Japanese yen, gold and low-risk government debt.

U.S. crude moved back above $30 a barrel and global benchmark Brent rose 52 cents to $33.24 after Russia reiterated its openness to talking with OPEC about output cuts - but only after a third consecutive day of oil price losses in Asia had weighed on regional stock markets.

Wall Street, however, looked set to open about 0.2 percent higher, according to index futures.

Oil prices, down 70 percent in the last 18 months as investors have fretted about global growth and an economic slowdown in China, have been a major factor behind a torrid start to the year for stocks.

The pan-European FTSEurofirst 300 index is down nearly 10 percent this year while the U.S. S&P 500 has lost 6.9 percent.

Market turmoil has in turn boosted expectations of further central bank stimulus measures. The Bank of Japan (BOJ) last week became the latest major central bank to introduce negative interest rates. Many in markets expect the European Central Bank (ECB) will ease policy further next month.

"There is still a lot of vulnerability in stock markets and the euro remains quite strong, which is adding pressure on the ECB to take action," BNP Paribas European rate strategist, Patrick Jacq said.

The FTSEurofirst 300 stocks index fell 0.3 percent on Wednesday, hit by weak earnings reports, although Swiss seeds and pesticides group Syngenta rose 6 percent after ChemChina agreed to buy the company for $43 billion.

Germany's DAX index slid 1 percent and Britain's FTSE 100  was off 0.5 percent.

Data on Wednesday showed euro zone businesses had a disappointing start to 2016, with growth in January matching the worst seen last year.

On Wednesday, MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.7 percent.

Japan's Nikkei <.N225> closed down 3.2 percent, hit by weak oil and a strong yen, wiping out almost all the gains it made after the BOJ became the latest major central bank to introduce negative interest rates.

Chinese shares dipped 0.4 percent.

Stock market weakness has driven investors into the shelter of low-risk government debt. Two-year yields on bonds from euro zone benchmark issuer Germany and Japanese five- and 10-year yields hit record lows on Wednesday.

Yields on 10-year U.S. Treasury bonds hit 10-month lows on Tuesday.

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Germany sold nearly 4 billion euros of five-year binds at a record low yield at auction of -0.24 percent.

"Record low yields don't appear to be giving people a headache and at the margin the auction is supportive for the ECB to do what is currently expected, which is a 10 basis point cut in the deposit rate next month," said Commerzbank rate strategist David Schnautz.

German 10-year yields  were last flat on the day at 0.31 percent.


In currency markets, the Japanese yen <JPY=>, which tends to be bought by investors in times of risk aversion, was 0.4 percent stronger on the day at 119.58 per dollar. It hit a six-week low of 121.70 per dollar after the BOJ's policy meeting on Friday.

"Risk sentiment is pretty fragile, so we are seeing yen being supported," ING currency strategist Petr Krpata said.

The Chinese yuan weakened to a three-week low against the dollar, hurt in part by expectations of a major currency transaction for ChemChina's bid for Syngenta.

The euro was flat at $1.0917 while sterling, which touched a three-week high on Tuesday after European Council President Donald Tusk presented proposals to keep Britain in the European Union, firmed 0.6 percent to close to $1.45, a three-week high.

Gold, also viewed as a safe-haven by investors, held close to three-week highs. It last traded at $1,127.50, flat on the day.

(Additional reporting by Hideyuki Sano in Tokyo, Dhara Ranasinghe, Sudip Kar-Gupta and Anirban Nag in London; Editing by Mark Heinrich)

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