Stocks flounder in Wall Street's wake, yen rises on BOJ optimism

[May 21, 2014]  By Nigel Stephenson

LONDON (Reuters) — European stocks were under pressure on Wednesday, spooked by overnight falls on Wall Street, and the dollar fell against the yen as the Bank of Japan suggested the world's third largest economy needed no additional stimulus for now.

A broad flight to quality helped push low-risk German Bund futures higher and weighed on lower-rated euro zone debt. Gold, also sought as a safe haven, held steady.

Europe's FTSEurofirst 300 share index was down 0.02 percent by 4.15 a.m. EDT, extending the declines of recent days and taking it further away from the 2014 peak it hit last week.

Rallies in European shares have paused on signs the economic recovery is stuttering. Elections to the European Parliament in coming days are being watched closely for any impact on reforms in several countries.

"We have seen since last Thursday some corrective action in (low-rated euro zone bond) markets ahead of the EU elections. This can go further," said Matthias van der Jeugt, a fixed income strategist at KBC.
 

The fall in European shares followed a 0.2 percent drop in Tokyo and a broad selloff on Wall Street, in which Caterpillar dropped 3.6 percent after the heavy machinery company said "retail statistics" for the three months to April were down 13 percent.

Tuesday's fall took losses in U.S. stocks to more than 1 percent since the Dow and the S&P 500 hit record closing highs on May 13 as investors seek confirmation the U.S. economy is accelerating.

The BOJ kept monetary policy steady, as expected, and signaled its aggressive stimulus was helping broaden the economic recovery. Governor Haruhiko Kuroda was optimistic Japan was on course to meet the bank's inflation target.

Later on Wednesday, Federal Reserve chair Janet Yellen speaks in New York and the U.S. central bank will release the minutes of its latest policy meeting. Most market participants do not expect any solid clues on when interest rates may rise.

Benchmark U.S. 10-year Treasury yields dipped in Europe to 2.51 percent, close to half-year lows. Comments from a senior Fed official that the central bank would be "relatively slow" in raising interest rates saw the dollar fall to a 3-1/2 month low against the yen.

"Kuroda's comments are lowering expectations of further BOJ stimulus and there is position squaring going on which is driving dollar/yen lower," said Manuel Oliveri FX strategist at Credit Agricole.

"At the same time one has to be cautious about the FOMC minutes with Yellen also due to speak later in the day."

EURO BOOST

The drop in U.S. yields also helped the euro, which rose 0.15 percent to $1.3717, pulling away from a 2-1/2 month low of $1.3648 hit last week on expectations the European Central Bank will ease monetary policy in June.

German Bund futures rose and cash 10-year yields edged lower, while yields on 10-year Spanish and Italian bonds each rose 9 basis points to 3.17 percent and 3.33 percent respectively.

Weaker shares burnished gold's appeal as a hedge and the metal held steady below $1,300 an ounce.

Brent crude oil futures edged up towards $110 a barrel as U.S. crude inventories fell and on renewed violence in OPEC producer Libya.

(Additional reporting by Lisa Twaronite in Tokyo, Alistar Smout in Edinburgh, Emelia Sithole-Matarise and Anirban Nag in London; Editing by John Stonestreet)

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