GLOBAL MARKETS-European shares test 2-yr highs, yen volatile before BOJ

Mon Jan 21, 2013 10:35am EST

* European shares test 2-yr high, world equities at 20-mnth
high
    * Dollar dips from 2-1/2-year high vs yen
    * German government bonds, oil prices dip

    By Marc Jones
    LONDON, Jan 21 (Reuters) - European shares inched towards
two-year highs on Monday, as a political attempt to break a
budget impasse in the United States and expectations of
aggressive Japanese stimulus bolstered the appetite for shares.
    U.S. House Republican leaders said on Friday they would seek
to pass a three-month extension of federal borrowing authority
in the coming days to buy time for the Democrat-controlled
Senate to pass a plan to shrink budget deficits. 
    European shares were supported by the news,
but with no clear response from the Democrats and a thin session
expected due to a market holiday in the United States, the
impact on assets such as bonds and commodities was limited.   
    By 1500 GMT London's FTSE 100, Paris's CAC-40
 and Frankfurt's DAX were up 0.4 to 0.6 percent,
leaving the pan-European FTSEurofirst 300 within touching
distance of a two-year high and MSCI's world index
 steady at a 20-month high.  
    Expectations that the Bank of Japan will deliver a bold
monetary easing plan at the end of its two-day meeting on
Tuesday also supported shares and created choppy conditions in
the currency market.
    According to sources familiar with the BoJ's thinking, the
government of new Prime Minister Shinzo Abe and the central bank
have agreed to set 2 percent inflation as a new target,
supplanting a softer 1 percent 'goal'. 
    The yen, which has fallen 13 percent against the dollar
 over the last two months as the shift in Japanese policy
has taken shape, touched a new 2-1/2 year low in early trading
but then firmed as traders cut short positions given the BOJ has
often fallen short of market expectations.        
    "Investors are being mindful that the moves we have seen
over the course of the last month or two are just worth locking
in at least until we understand how the BOJ are really going to
play in the future," said Jeremy Stretch, head of currency
strategy at CIBC World Markets.
   
    
    CURRENCY WARS
    Japanese equities have surged in recent weeks in
anticipation of a more aggressive monetary policy stance, but
not everyone is happy. 
    The slump in the yen has prompted Russia's deputy central
bank governor to warn of a new round of 'currency wars' and the
medium-term risk of running ultra-loose monetary policies is
likely to be a theme of the World Economic Forum in Davos, which
opens on Wednesday. 
    With little in the way of economic data or debt issuance and
U.S. markets shut for the Martin Luther King public holiday, the
rest of the day was expected to be a fairly quite for investors.
    As the first European finance ministers' meeting of the year
got under way, most euro zone government bonds were trading
virtually flat and the euro was steady at $1.3316.
    Market pressure on Europe is now less intense thanks to the
European Central Bank's promise to prevent a collapse of the
euro. Policymakers are set to discuss Cyprus's plight and plans
for the euro zone's bailout fund to directly recapitalise banks.
    French Finance Minister Pierre Moscovici said as he arrived
at the Brussels meeting that a proper recapitalisation strategy
was very important. 
    "Negotiations will be complex, and a final decision is
unlikely to emerge soon. Risks for sovereign spreads in the
periphery should be limited, but we have some concerns that the
long-term solution may fall short of what a real banking union
needs," said UniCredit economist Marco Valli.
    
    POLITICAL GAME
    The efforts by Republican lawmakers to give the U.S.
government leeway to pay its bills for another three months
dented demand for safe haven assets and pushed German government
bond yields near the top of this year's range. 
    The U.S. Treasury needs congressional authorisation to raise
the current $16.4 trillion limit on U.S. debt sometime between
mid-February and early March. A failure to achieve that could
lead to a debt default.     
    "This is part of the political game, it remains to be seen
whether the Democrats will accept it," KBC strategist Piet
Lammens said, adding that investors' working scenario was that a
solution to raise the ceiling would be eventually found anyway.
    One of the key factors that drove 2-year German yields
higher last week was also the prospect of sizeable early
repayments of the 1 trillion euros euro zone banks took from the
ECB roughly a year ago.
    The central bank will publish on Friday how much banks plan
to return at the optional first repayment date on Jan. 30. A
Reuters poll on Monday showed around 100 billion euros are
expected to be repaid although some predict it could be as high
as 250 billion. [ID:nL4N0AQ2IP ]  
   
    OIL OVERSUPPLY    
    German markets showed no reaction after the country's
centre-left opposition party edged Chancellor Angela Merkel's
conservatives from power in a regional election on Sunday,
reviving its flagging hopes for September's national election.
 
    The Bundesbank's latest report delivered an upbeat message
on the country's economy, saying a recent slump should be
short-lived and may have already bottomed out. 
    Oil prices took their cues from a report in the United
States at the end of last week that showed consumer sentiment at
its weakest in a year as a result of the uncertainty surrounding
the country's debt crisis.
    Concerns about demand overshadowed supply disruption fears
reinforced by the Islamist militant attack and hostage-taking at
a gas plant in Algeria, a member of the Organization of
Petroleum Exporting Countries. 
    Brent futures were down by 40 cents to $111.47 per
barrel by mid-afternoon. U.S. crude shed 43 cents to
$95.13 per barrel after touching a four-month high last week.
    "The over-riding fundamental feeling in the market is that
crude oil is over-supplied in 2013," said Tony Nunan, an oil
risk manager at Mitsubishi.
    Last week's data showing a pick-up in the Chinese economy
helped keep growth-sensitive copper prices steady at
roughly $8,056 an ounce. Gold, meanwhile, reversed
Friday's losses to stand at $1,688 an ounce.