GLOBAL MARKETS-Upbeat outlook keeps shares near 20-mth highs, dollar firm

Fri Jan 11, 2013 8:51am EST

* World shares near 20-month high on global recovery hopes

* Yen falls against dlr as Japan signals big policy shifts

* China inflation pick-up hurts oil

By Richard Hubbard

LONDON, Jan 11 (Reuters) - World shares hovered near a 20-month high on Friday as upbeat comments from the European Central Bank and a massive stimulus plan in Japan boosted optimism over the global economic outlook.

U.S. stock index futures pointed to a steady start on Wall Street, a day after the S&P 500 hit a five-year high, with record profits by Wells Fargo, the first big bank to report this season, likely to support sentiment.

The MSCI index of world shares was unchanged at 349.6 points, close to its highest level since May 2011.

Hopes for steady global growth were reinforced on Thursday by strong Chinese export data and comments from the ECB suggesting Europe's economy is set for a recovery in 2013.

The ECB also said it had decided unanimously to keep interest rates at a record low of 0.75 percent and had not even discussed further cuts.

"The (market) optimism is exceptionally exuberant at the moment, and it comes on the back of the unanimous vote in the ECB yesterday on rates," said Brenda Kelly, markets analyst at financial spread-betting company IG.

Europe's FTSEurofirst 300 index of top companies across the region neared levels last seen in March 2011 shortly after the ECB decision and hung on to the gains on Friday, little changed at 1,163.62 points.

London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were all broadly steady.

"Equities are very overdue a rest, but that shouldn't make people throw in the towel in my opinion (as) they will continue to be supported by central banks' very accommodative policies," said Edward Page Croft, managing director at investment advisory firm Stockopedia.

The euro was also unchanged at $1.3270 but only because the ECB's more upbeat views had sent the common currency up 1.6 percent on Thursday, for its biggest daily gain in five months.

ITALY SOUGHT

The better tone in the markets encouraged return-hungry investors to snap up a 3.5 billion euro offer of new three-year Italian bonds, which sold at the lowest yields since March 2010.

The auction result followed a well received Spanish debt sale on Thursday, and reflects the growing view among investors that the worst of the euro zone's three-year debt crisis is over, thanks largely to the efforts of the ECB.

Italy, along with Spain, have become more attractive to investors since the ECB pledged to buy unlimited amounts of debt from any euro zone country that gets into trouble and is willing to meet its reform conditions.

Ten-year Italian bond yields fell 3.5 basis points after the latest auction to around 4.1 percent, their lowest level in over two years.

YEN PRESSURE

Meanwhile the yen fell further against the dollar after the Japanese government agreed a $117 billion spending boost for the economy, and new Prime Minister Shinzo Abe stepped up pressure on the Bank of Japan to ease monetary policy more aggressively.

The BOJ is likely to adopt a 2 percent inflation target at its Jan. 21-22 meeting, double the current goal, and will consider more purchases of government debt to achieve the target, sources told Reuters this week.

The prospect of looser monetary and fiscal policy when new data has revealed that Japan's current account deficit is deteriorating - meaning it will need to attract funds from overseas - has put enormous pressure on the yen.

The dollar was up 0.2 percent at 88.95 yen, a 2-1/2 year high, and was heading for 95 yen by the end of the first quarter, according to Ian Stannard, head of European FX strategy at Morgan Stanley. "The pace of increase, not just (in dollar/yen) but also the pace of policy reforms in Japan, is exceeding market expectations," he said.

In the commodity markets oil prices slipped as traders adjusted to the current lacklustre growth in the global economy, which has prompted the world's biggest producer, Saudi Arabia, to cut back supplies.

Data on Friday showing that China's annual consumer inflation had accelerated to a seven-month high of 2.5 percent in December also dampened demand as it reduced the likelihood of the central bank easing monetary policy to boost activity.

Brent crude futures fell more than $1 a barrel to $110.62 , while U.S. crude slipped 40 cents to $93.42.

Gold prices slipped below $1,670 an ounce as the firmer tone to the dollar prompted some buyers to cash in gains after the metal's biggest one-day rise this year.

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