GLOBAL MARKETS-Oil and euro drop after ECB comments, shares rise

Thu Dec 6, 2012 2:02pm EST

* ECB predicts euro-zone weakness, hitting euro, oil prices

* U.S. stocks rise as investors keep eye on 'fiscal cliff' talks

* Europe's FTSEurofirst 300 index up 0.7 pct - an 18-month high

By Herbert Lash

NEW YORK, Dec 6 (Reuters) - Oil prices slipped and the euro fell in its sharpest drop in a month on Thursday after the European Central Bank said growth in the euro zone is likely to shrink next year, sparking speculation of an interest-rate cut.

But global shares rose, with the three major U.S. stock indexes getting a modest lift as investors watched for signs of progress in the "fiscal cliff" talks and Apple's stock rebounded a day after its worst one-day percentage loss in nearly four years. The FTSEurofirst-300 Index closed at an 18-month high.

German bonds rallied and Brent crude oil fell below $107 a barrel after ECB President Mario Draghi said policy-makers held a wide discussion on interest rates, leaving the door open to a possible cut in borrowing costs next year.

The ECB left rates on hold, but the bank's new staff put projections on gross domestic product in a range of a declining 0.9 percent to growing just 0.3 percent next year, suggesting contraction is far more likely than not.

"The underlying reason for euro weakness is still there, and the ECB's warnings of continued weakness over the next year could be the catalyst for a continued euro drop," said Neal Gilbert, market strategist at GFT in Grand Rapids, Michigan.

The euro fell 0.84 percent to $1.2956, while the U.S. dollar index rose 0.65 percent to 80.295.

Brent crude was down $1.97 at $106.84.

The March 2013 Bund future, which became the front-month contract during the session, rallied more than half a point to a session high of 145.74. Yields on the 10-year German bond fell to 1.29 percent, their lowest since late August.

U.S. stocks edged higher in choppy trading, but traders kept an eye on Washington and negotiations to avert some $600 billion of tax hikes and spending cuts scheduled to start in January if Congress fails to reach an agreement on deficit reduction.

President Barack Obama takes his "fiscal-cliff" campaign to the home of a family in northern Virginia to illustrate the impact of letting taxes on the middle class rise as signs emerge that Republicans are contemplating a change in strategy in their battle with Democrats over deficit reduction.

The office of U.S. Senator Jim DeMint, a conservative Republican from South Carolina and a favorite of the Tea Party wing of the party, said he will resign in January to run the Heritage Foundation, a conservative think tank.

Upbeat guidance from Broadcom and Apple's turnaround helped lift technology stocks. Apple erased initial losses of as much as 3.7 percent at the open, which briefly pulled its market capitalization below $500 billion, to climb 1.66 percent to $547.74.

"It's really being held hostage to (the fiscal cliff negotiations) and the stock action of Apple," said Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston.

The number of Americans filing new claims for unemployment benefits last week fell to the pre-Superstorm Sandy range, suggesting a return to modest job growth after a storm-related setback. It was the third straight weekly decline.

The Dow Jones industrial average was up 15.30 points, or 0.12 percent, at 13,049.79. The Standard & Poor's 500 Index was up 2.91 points, or 0.21 percent, at 1,412.19. The Nasdaq Composite Index was up 15.88 points, or 0.53 percent, at 2,989.58.

MSCI's all-country world equity index rose 0.2 percent to 333.56, while European stocks hit fresh 2012 highs and some traders eyed more rallies after equity indexes broke key resistance levels.

The FTSEurofirst 300 index of top European shares hit an 18-month closing high at 1,131.85, up 0.69 percent for the day, with bullish technicals, an improving global outlook and attractive valuations raising equities' appeal.

"We still have some risks, but the magnitude of the risks has diminished and they are being handled in a better way," said Ben Hauzenberger, a fund manager at Zurich-based Swisscanto Asset Management.

Benchmark U.S. Treasury yields dipped to near their lowest in three weeks, supported by expectations that the Federal Reserve will announce a new bond-purchase program when it meets next week.

The benchmark 10-year U.S. Treasury note rose 6/32 in price to yield 1.57 percent.

Crude oil also faced pressure after a U.S. inventory report showed big builds in oil products, with gasoline stocks up by the highest margin since September 2001, surging 7.86 million barrels to 212.12 million barrels in the week to Nov. 30.

U.S. crude futures fell $1.86 to $86.02 a barrel.

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