LONDON (Reuters) - The euro
lifted off lows and European shares sagged on Friday as
a new five-year low in euro zone inflation was viewed as
not extreme enough to drive the European Central Bank
back into its increasingly bare policy cupboard.
Wall Street was expected to edge back up towards all-time highs
though, suggesting the market's recent upswing remained intact
following this week's strong run of U.S. data and the view that
likely future action from central banks like the ECB will keep
markets well oiled.
Consumer prices in the 18 countries using the euro rose by just 0.3
percent year-on-year in August, the lowest since October 2009 and
well below the ECB's preferred level of just under 2 percent, data
showed on Friday.
But it was also right in line with economists' expectations and
helped cool speculation that the ECB, which meets on Thursday, would
cut rates on its way towards U.S.-style quantitative easing --
printing money by buying bonds -- following strongly-worded comments
from ECB President Mario Draghi last week.
The euro rose to the day's high of $1.3195 against the dollar, and
yields on core euro zone bonds inched away from record lows as the
region's share markets also gave back their early gains.
"Although Draghi has waved the flag I don't thank there is enough
there (in the inflation data) to instigate another round of easing,"
said Bank of Tokyo Mitsubishi currency strategist Derek Halpenny.
"In terms of another rate cut, I think they will want to wait until
they can be more certain that inflation expectations have become
unanchored."
But together with updated projections from ECB staff, the inflation
data is likely to lead to a lively discussion next Thursday about
whether the bank should accelerate existing policy measures because
of the danger of deflation.
Overnight, euro zone money market rates dropped into negative
territory for the first time ever. That essentially means banks are
now paying to lend to each other, and it reflects expectations for a
long period of cheap ECB money.
German Finance Minister Wolfgang Schaeuble warned on Friday,
however, that the ECB has run out of tools to fight deflation,
having earlier backed French President Francois Hollande's calls for
greater government investment to boost growth.
Front-running the euro inflation figures, French data showed
producer prices fell 0.3 percent month-on-month in July and 0.6
percent year-on-year. It has a host of reform measures planned for
September likely to push inflation even lower.
"What is more important for the ECB is inflation expectations and
what is worrying for them is that they have been going down," said
Philippe Gudin de Vallerin head of European research at Barclays.
RUSSIAN BEARS
Worries that persistent tensions between Russia and Ukraine could
damage Europe's already-weak recovery remained a concern for
markets.
The rouble <RUB=> was at an all-time low versus the dollar in Moscow
as Russian stocks extended a 5 percent fall this week. Earlier,
Asian shares had also felt the strains as they pulled back from a
six-year high.
Pro-Russia rebels fighting in Ukraine said on Friday they would
comply with a request from the Kremlin and open up a 'humanitarian
corridor' to allow the withdrawal of Ukrainian troops they have
encircled.
It was not clear how the government in Kiev would react to the
offer, but the first word from the Ukrainian military was negative.
It said in a statement that the offer showed that "these people (the
separatists) are led and controlled directly from the Kremlin".
NATO Secretary-General Anders Fogh Rasmussen added a warning that
Russian forces were engaged in direct military operations inside
Ukraine in a blatant violation of Ukraine's sovereignty.
MSCI's broadest index of Asia-Pacific shares outside Japan dipped
about 0.2 percent and Japan's Nikkei stock average shed 0.2 percent
after a spate of weak Japan data, bringing its monthly loss to about
1.3 percent.
RISKY BUSINESS
Overall, however, global share markets remain on a hot streak.
Investors are wagering that new stimulus from the ECB, and possibly
also the Bank of Japan before the end of the year, is likely to keep
cheap global funding flowing.
MSCI's 45-country world share index was on course for its third
straight week of gains after another run of record highs on Wall
Street this week and moves up in Europe and emerging markets.
The high-flying dollar also edged up to 103.91 yen, as it
headed for a seventh straight week of gains versus the basket of six
major currencies.
Among commodities, gold was steady on the day at $1,285 an
ounce after rising for the third straight session against a backdrop
of Ukraine tension and ECB easing bets. It was on track for its
first monthly gain since June.
Brent crude added about 0.3 percent to $102.74 a barrel, but was on
track for its second monthly loss. Global growth-sensitive metal
copper, meanwhile, was set for its biggest monthly loss since March.
(Reporting by Marc Jones, editing by John Stonestreet and Toby
Chopra)
