European shares up as banks reassure, dollar holds near highs

[October 27, 2016]  By Vikram Subhedar

LONDON (Reuters) - Reassuring results from some of Europe's biggest banks gave financials a boost on Thursday and helped offset weakness in oil-related stocks, while higher bond yields underpinned the dollar.

As corporate earnings continued to dominate headlines, growing expectations that the U.S. Federal Reserve will raise interest rates by the end of the year have kept gains in risky assets in check.

Markets are now pricing in a 74-percent chance that the U.S. Federal Reserve will raise interest rates at its December meeting, according to CME Group's FedWatch tool, following a series of hawkish comments from Fed policymakers.

Bets that the Fed will hike rates have driven the dollar to nine-month highs against a basket of currencies <.DXY> this week and have supported U.S. 10-year Treasury yields <US10YT=RR>.

The "steepening of the US yield curve works as a magnet for capital coming at this point in particular out of low yielding environments such as Japan and Switzerland," said analysts at Morgan Stanley, adding that these flows will continue to support the dollar.

The dollar index was up 0.1 percent at 98.716, just off its recent highs.

An overnight slide in oil prices and underwhelming results from Apple <AAPL.O> soured the mood in Asian stocks where technology sectors led losses in Japan.

Europe's STOXX 600 <.STOXX> was up 0.3 percent, however, though defensive sectors such as healthcare and utilities provided the biggest boost to the index, reflecting investor caution.

Banks <.SX7P>, among the worst performing sectors in Europe this year, rose 0.5 percent helped by a surprise third-quarter profit at Deutsche Bank <DBKGn.DE> and forecast-beating numbers from Barclays <BARC.L> which, like its U.S. rivals, enjoyed a significant pick-up in bond trading revenue.

Traders work at their desks in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany, October 21, 2016. REUTERS/Staff/Remote

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Data from the European Central Bank showing lending growth to euro zone companies and households grew at a steady pace last month was also seen helping the sector.

The euro <EUR=> was little changed against the dollar while sterling <GBP=D4> rose after data showed Britain's economy barely slowed in the third quarter despite the Brexit vote shock.

UK ten-year government bond yields <GB10YT=RR> rose to a 10-day high of 1.2 percent as the strong data further diminished the chance of a fresh interest rate cut by the Bank of England next week.

In commodity markets, crude oil futures rebounded from earlier losses as traders remained cautious that OPEC would be able to cut production come late November. [O/R]

U.S. crude <CLc1> edged up 0.4 percent to $49.38 a barrel, while Brent crude <LCOc1> added 0.7 percent to $50.33.

Spot gold XAU= rose 0.2 percent to $1,269.38 an ounce.

(Reporting by Vikram Subhedar; Editing by Raissa Kasolowsky)

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