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Published: Thursday August 9, 2012 MYT 8:10:00 AM
Updated: Thursday August 9, 2012 MYT 11:49:17 AM

GLOBAL MARKETS-Shares flat as policy optimism cools(Update)


NEW YORK: Global shares lost steam on Wednesday and traded little changed, while the euro fell as a lack of details prompted investors to tone down optimism for early central bank action to tackle the euro zone debt crisis.

Risky assets began rising on Friday after U.S. jobs data eased concerns about global growth but supported hopes of further policy easing by the Federal Reserve. Last week's signal by European Central Bank President Mario Draghi that it may ease borrowing costs for Spain and Italy provided further optimism.

But conviction waned on Wednesday after the Bank of England gave no hint of future action despite slashing its growth forecast.

Investors had hoped the BoE would point to an easing in policy later in the year as the gloomy contents of its quarterly economic outlook had been widely anticipated.

The uncertain direction for monetary policy prompted caution, and stocks on Wall Street ended the day with a tiny gain as investors bought shares in defensive sectors. The advance was enough to extend the S&P 500's rally to a fourth day.

"We're certainly skeptical about the ability of the authorities to really make big changes in the euro zone landscape," said Richard Batty, strategist at Standard Life Investments.

"I think this is just one of those days where the market is coming more round to a more skeptical view of whether they can achieve what they need to achieve, given how poor these economies are and how difficult it is to make the fiscal and structural adjustments to make them more competitive."

Still, hopes were not completely dashed that action would be taken to lower Spanish and Italian borrowing costs, helping to limit the euro's decline and keep a floor under equities.

In a further sign of Europe's worsening economic conditions, France's central bank said the French economy was likely to slip into a shallow recession in the third quarter.

PATH OF LEAST RESISTANCE

Oil futures turned mixed late in the day after Brent crude hit a three-month high on data that showed a sharp drawdown in U.S. crude stockpiles last week and as concerns deepened over the immediate outlook for North Sea oil production.

Brent futures for September settled up 14 cents at $112.14 a barrel after earlier hitting a high above $113. U.S. crude dipped 32 cents to $93.35.

The FTSEurofirst 300 index of top European shares closed up 0.2 percent.

European shares had gained since Draghi first signaled a more interventionist stance to defend the euro two weeks ago.

The Dow Jones industrial average edged up 7.04 points, or 0.05 percent, to 13,175.64.

The Standard & Poor's 500 Index added 0.87 point, or 0.06 percent, to 1,402.22.

The Nasdaq Composite Index was off 4.61 points, or 0.15 percent, to 3,011.25.

Trading volume was again light, with about 5.72 billion shares changing hands on the New York Stock Exchange, the American Stock Exchange and Nasdaq, well below last year's daily average of 7.84 billion.

"It's very positive that we found better footing throughout the session, which indicates that the market's path of least resistance is higher," said Jeff Mortimer, director of investment strategy for BNY Mellon Wealth Management in Boston.

Standard Chartered Bank, under fire because of accusations it violated U.S. laws by hiding $250 billion in transactions tied to Iran, clawed back some of its huge losses and was up more than 7 percent. The British bank's shares dived 16.4 percent on T ues day on hefty volume.

The bank's top executives were working on its defense strategy on Wednesday, having already contested the regulator's figures.

MSCI's world equity index was nearly flat, eking out a gain of 0.02 percent.

The euro was down 0.3 percent at $1.2359 after hitting a one-month high of $1.2443 on Monday.

Draghi has said the bank may buy the short-term bonds of euro zone nations battling with rising yields on their debt, but that any action had to be in conjunction with the euro zone's bailout funds and under strict conditions.

Since Draghi's comments, "volatility has been pushed lower and (the euro) is well supported. We would expect the euro to fall within a broad range between $1.21 and $1.26, with a catalyst for a breakout only emerging in September," said Camilla Sutton, chief currency strategist at Scotia Bank in Toronto.

In the debt market, Germany's sale of 3.4 billion euros of 10-year government bonds attracted more demand than a similar auction last month, indicating investors' appetite for safe-haven assets has not diminished much since Draghi's statements.

Ten-year Spanish government bond yields briefly touched the 7 percent level - seen as unsustainable in the long run - on the growing view that it may take time until Spain asks for a bailout.

U.S. Treasuries prices eased, with yields reaching the highest in over a month after an auction of $24 billion of 10-year notes was met with tepid demand.

Benchmark 10-year notes were 07/32 lower in price to yield 1.651 percent. - Reuters

Reuters reported from TOKYO Thursday morning:

GLOBAL MARKETS-Shares at three-month high after China, Australia data TOKYO: Asian shares rose to a three-monthhigh on Thursday after a drop in Chinese consumer inflation left room for further policy easing, while Australia's labour market improved.

The new indicators were published against a backdrop of guarded investor optimism for decisive official action to tacklethe euro zone debt crisis. MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.7 percent, extending gains for a fourth session in a row. Australian shares extended gains to 0.3 percent from around 0.1 percent after data showed employmentrose and the jobless rate ticked down in July.

China's annual consumer inflation fell to a 30-month low of1.8 percent in July from June's 2.2 percent, while the producerprice index dropped 2.9 percent in July from a year earlier.

"This number gives more room for policy easing. It is nowpretty clear that CPI will likely be below the official 4percent target for the year, so the policy focus for thegovernment can stay clearly on growth," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.

Japan's Nikkei stock average erased earlier losses to rise 0.6 percent.

South Korea's central bank kept interest rates steady on Thursday as widely expected to assess the impact of last month's surprise cut, but investors continue to price in another reduction soon to shore up Asia's fourth-largest economy.

The Bank of Japan is also expected to stand pat when it concludes its two-day policy meeting on Thursday.

VAGUE HOPES

Markets have been supported over the previous three sessions by hopes the European Central Bank will start buying sovereign bonds to lower borrowing costs for Spain, and the Federal Reserve will expand its monetary easing, despite a lack of comments or data supporting such views, and suggestions from the authorities that any steps were not likely to be taken before September.

The euro inched up 0.1 percent to $1.2380, but still capped below a one-month high of $1.2444 hit on Monday.

The Australian dollar edged up 0.3 percent to $1.0590, helped by the solid jobs figures that fortified views the central bank will stand pat for now.

"The euro, while there are risks, has been supported by the notion that something will be done (about the debt crisis) regardless of the time it may take," said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo.

As euro short-covering had been completed, the currency was expected to stick to narrow ranges until fresh factors emerged, Maeba said.

While he believes the Australian dollar may be approaching a near-term top after rallying to its highest since March earlier this week, it could continue to draw support from the country's relatively high yields compared to countries where yields are negative.

Oil firmed after ending mixed on Wednesday. Brent was little changed at $112.16 a barrel on Thursday while U.S. crude futures rose 0.2 percent to $93.54 a barrel.

Data on Wednesday showed the adverse impact from the euro zone's three-year debt crisis has spread to the region's core economies, with German industrial output falling more than expected in June, as German imports and exports fell too.

In France, another core euro zone member, the central bank said the economy was likely to slip into a shallow recession in the third quarter.

Spain was spared further negative news when ratings agency DBRS on Wednesday stopped short of cutting Spain and Ireland's debt below a European Central Bank trigger for extra charges to banks using the countries' bonds as collateral.

DBRS is the last of the four agencies used by the ECB to keep the sovereigns at the A level.

Asian credit markets were resilient, with the spread on the iTraxx Asia ex-Japan investment-grade index tightening by 2 basis points and hovering near a four-month low. - Reuters

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