GLOBAL MARKETS-German jitters hit European shares, euro

Thu Jan 31, 2013 8:45am EST

* European shares extend losses

* Weak earnings, Deutsche loss, German retail sales weigh

* Euro fall tempered by dollar under pressure

By Marc Jones

LONDON, Jan 31 (Reuters) - European shares fell for a second straight day and the euro halted its rally as weak German retail sales data and a $3.5 billion loss at its biggest bank added to investors' nerves after a shock fourth quarter contraction in the U.S. economy.

Data on Wednesday showed U.S. GDP slipped 0.1 percent, although the Federal Reserve indicated the pullback was likely to be brief and repeated its promise to continue supporting the economy.

The drop in German retail sales, stagnant French consumer spending and the huge quarterly loss at Deutsche Bank dashed hopes of a quick rebound for European shares, which had their biggest daily fall of the year on Wednesday after surging 3.7 percent this month.

London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX fell 0.3 to 0.9 percent on Thursday and the MSCI world index was down 0.1 before what was expected to be another difficult day on Wall Street.

"Perhaps the German retail sales have contributed a little bit, but we knew that Q4 was weak, so I would it attribute it more to earnings news," said Chris Scicluna, an economist at Daiwa Capital Markets. "The Deutsche Bank loss does look to be on the sizable side. There has clearly been some mismatch between financial markets and the real economy, so that does lend itself to a bit of a pullback."

In the currency market, the German jitters also put the euro under pressure and halted its recent 4 percent rally.

Renewed early afternoon selling left it at $1.3555, well short of Wednesday's 14-month high of $1.3588. The Federal Reserve's promise of continued support was widely expected to mitigate the fall, however, by keeping downward pressure on the dollar.

Evidence of this was seen as the dollar slipped against the yen having hit its strongest level against the Japanese currency since 2010 on Wednesday.

It regained some ground after a Bank of Japan deputy governor fired the latest shot in what appears to be an escalating currency war, with the strongest signal yet that it will implement bold new stimulus if needed.

In the United States, the number of people filing new claims for unemployment benefits bounced off five-year lows last week, new data showed, pointing to modest jobs growth before Friday's more closely watched monthly payrolls report..

PULL-BACK

The U.S. earnings season is in full stride. Overall, S&P 500 fourth-quarter earnings are now forecast to have risen 3.8 percent, above the 1.9 percent predicted at the start of the season but well below a 9.9 percent fourth-quarter average.

Facebook shares dropped 6.7 percent in premarket trading after its growth disappointed analysts, while chip giant Qualcomm gained 6 percent after raising its 2013 targets.

On the first big day of the European earnings season, AstraZeneca and Royal Dutch Shell reported respective falls of 5.1 percent and 1.8 percent. Their shares accounted for a fifth of the 0.5 percent drop in the pan-European FTSEurofirst 300 index.

The nervousness also pushed up Spanish and Italian government bond yields as some investors switched from higher-yielding debt into German Bunds.

Spanish 10-year yields rose 6 basis points on the day to 5.29 percent, while equivalent Italian debt rose 7 bps to 4.35 percent.

German Bund futures were half a point higher, spurred on by the Fed's determination to maintain its policy of stimulus for the U.S. economy and by month-end buying.

COMMODITY CREEP

The downbeat European mood also began to creep into commodities markets, though investors seemed broadly happy to stick with the view that the global economy is gradually regaining strength.

Risky assets such as equities, commodities, and high-yield debt have risen sharply in the past six months as growth in emerging economies such as China's has picked up and fears of a collapse of the euro have been calmed by the European Central Bank.

Spot gold drifted down to $1,675 an ounce, having hit a one-week high on Wednesday, while oil prices inched down 23 cents to just under $115 per barrel, still well above their starting price this year of $110 a barrel.

There was no sign of weakness in growth-attuned copper as it marched to its highest level since October.

"We are still quite confident about a Chinese copper demand recovery in the first half, and we have seen evidence of pent-up demand, so the downside risk is limited," said Henry Liu, head of commodity research at Mirae Asset Securities in Hong Kong. "But exceeding $8,500 this year might be a challenge, because domestic inventories are quite high," he added.