Europe shares fall before oil recovers, Wall St. to dip at open

[March 21, 2016]  By Nigel Stephenson

LONDON (Reuters) - A stronger dollar and weaker oil prices weighed on European shares on Monday, though gains in Chinese equities and a benign U.S. interest rate outlook brightened investors' mood.

At the start of a week shortened by the Easter break, the pan-European FTSEurofirst stock index  moved in and out of positive territory after Asian shares eked out small gains.

U.S. shares looked set to open marginally lower, according to index futures.

Brent crude fell more than half a dollar a barrel early in the day as a rise in the number of active oil rigs highlighted the supply glut that saw prices fall from above $100 in mid-2014 to lows around $27 earlier this year.

Losses were later reversed and it last traded at $41.29, 9 cents higher on the day and up 50 percent from 2016 lows.

"Dollar strength that might reverse and a production freeze that might turn out to be an empty vessel are not the strongest foundations on which to be long oil at $40 a barrel," PVM Oil Associates' David Hufton said.

The dollar, recovering further after falling last week when U.S. Federal Reserve policymakers revised down the number of times they expect to raise interest rates this year to two from four, edged up against a basket of currencies.

Sterling was a notable faller in the currency market. Traders cited concerns over splits in the ruling Conservative Party over last week's budget and a referendum on Britain's European Union membership, after a pro-"Brexit" minister quit on Friday over spending cuts.

The FTSEurofirst 300 index  fell 0.2 percent. While shares in oil and gas companies and basics resources firms were both down 1.6 percent, Telecom Italia was a standout gainer, rising 3.8 percent after the company said Chief Executive Officer Marco Patuano was stepping down.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.1 percent after entering positive territory for the first time this year on Friday. However, shares in Australia and South Korea fell.

Chinese stocks rose. The CSI 300 index of the largest listed companies in Shanghai and Shenzhen closed up 2.4 percent while the Shanghai Composite gained 2.2 percent.

China's state margin lender, the China Securities Finance Corp, said it would resume some short-term lending after suspending parts of its business 18 months ago. It also cut brokerages' borrowing costs.

"It's a clear signal that regulators are ready to provide the market with easier, and cheaper funding," said Wang Yu, analyst at Pacific Securities.

Top Chinese officials said on Sunday the economy was showing signs of improvement while capital outflows from the country were moderating.

Perceptions of how Chinese authorities are handling an economic slowdown have been big drivers of financial markets in recent months, along with gyrations in the oil price and the outlook for U.S. interest rates.

EURO TICKS UP

The euro strengthened 0.1 percent to $1.1275 while the yen held steady at 111.39 per dollar.

Sterling  fell 0.6 percent to $1.4393, pummeled after the resignation of eurosceptic Work and Pensions Secretary Iain Duncan Smith heightened worries over divisions in Prime Minister David Cameron's government before the June 23 referendum.

"Sterling does not normally react strongly to UK politics so this is probably due to Brexit," said Richard Benson, head of portfolio investment at currency managers Millennium Global in London. "The referendum is just making people focus on issues like this a lot more."

Yields on low-risk German government bonds fell. Ten-year yields were last down 1.5 basis points at 0.21 percent.

Gold fell as the dollar held firm. It last traded at $1,245.66 an ounce.

(Additional reporting by Saikat Chatterjee in Hong Kong, Patrick Graham and Amanda Cooper in London; Editing by Catherine Evans)

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