GLOBAL MARKETS-Euro falls on grim outlook, U.S. jobs data eyed

Fri Dec 7, 2012 7:42am EST

* Euro falls 0.4 pct as rate cut talk grows

* Bundesbank cuts growth outlook, hints at recession

* European stocks flat, ending 4 days of gains

* U.S. markets brace for November nonfarm payrolls

By Richard Hubbard

LONDON, Dec 7 (Reuters) - The darkening outlook for Europe's economy sent the euro to a nine-day low on Friday and halted a rally in share markets ahead of November's U.S. jobs report, which could fuel hopes of more monetary policy easing.

Analysts expect the giant U.S. economy to have added about 93,000 extra jobs in the month, compared with October's gain of 171,000, as superstorm Sandy took its toll on the figures. The jobless rate is seen holding steady at 7.9 percent.

U.S. stock index futures pointed to a slightly weaker tone ahead of the data, and U.S. Treasury yields were broadly steady near three-month lows of 1.58 percent.

Uncertainty over whether U.S. lawmakers will agree on a deal to avert spending cuts and tax increases that will otherwise be triggered in early 2013 has been supporting safe-haven debt like Treasury bonds while limiting gains in stocks, and the jobs data may not change the picture significantly.

"We suspect this set of payroll numbers may be less market sensitive than usual, largely because markets are uncertain about the impact from the superstorm," said Philip Shaw, chief economist at Investec.

The euro was down 0.4 percent at $1.2925, extending a retreat from a seven-week peak of $1.3127 hit on Wednesday, on talk that the region's grim economic outlook could trigger an early rate cut by the European Central Bank.

The gloom surrounding the euro zone deepened on Friday when Germany's central bank cut its growth outlook and pointed to risks of a recession as the three-year-old debt crisis takes its toll on the region's largest economy.

The bleak warning came just a day after the ECB slashed its own economic forecasts for the entire 17-nation euro area next year, while leaving its main interest rate at a record low 0.75 percent for the fifth month running.

"The discussion on interest rates is what started the slide in the euro in the last 24 hours, and the Bundesbank report has just compounded that," said Neil Mellor, currency strategist at Bank of New York Mellon.

Elsewhere in the foreign exchange market the yen briefly rose after a strong earthquake struck northeast Japan, triggering a one-metre tsunami. A more powerful earthquake in March 2011 led to a sharp rise in the yen on expectations that Japanese investors would bring funds held abroad back home.

CLOUDS DARKEN

The shift in focus back to Europe's problems and away from the outlook for China and the United States, where hopes had been growing of gradual strengthening in economic activity, brought to a close the rally in European shares.

The FTSEurofirst 300 index of top European shares, which hit an 18-month peak on Thursday, was virtually unchanged at 1,130 points, while Germany's Dax, London's FTSE 100 , and Paris's CAC-40 were all little changed.

"You cannot stand in the way of the numbers, which tell us Europe will be in a recession next year and earnings will be poor," said broker Justin Haque at Hobart Capital Markets.

The bad news also extended to the British economy, with manufacturing output falling in October at the fastest pace since June and well below most economists' forecasts. Analysts said the data pointed to further contraction in the economy as a whole in the fourth quarter.

The MSCI world equity index was also down around 0.1 percent at 333.66, despite an earlier rally in Asian markets which left MSCI's broadest index of Asia-Pacific shares outside Japan up 0.5 percent, its third straight weekly gain. The index has gained about 17 percent so far this year.

GROWTH KEY

Riskier asset markets like equities and commodities have been buoyed by signs of renewed economic momentum in regional powerhouse China, but the growing concern about Europe is acting as a drag on gains.

As a result oil prices barely moved on Friday, with Brent crude one cent lower at $107.02, while U.S. crude futures was 23 cents cheaper at $86.03.

"The big picture is that Europe is weak, U.S. is undecided and China is strong, so the news flow from these three will be what determines prices," said Jonathan Barratt, chief executive of research firm Barratt's Bulletin.

Gold prices eased back below $1,700 an ounce, but again trading was cautious ahead of a U.S. employment report.

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