GLOBAL MARKETS-Euro on the ropes after dive in inflation

Fri Nov 1, 2013 9:00am EDT

* Euro remains under pressure after biggest fall vs dollar
in 6 mths
    * European shares lower but head for 4th week of gains
    * Solid China manufacturing data limits Asian share losses
    * Dollar index at 2-week peak after US data suggests economy
resilient
    * Wall Street expected to inch higher

    By Marc Jones
    LONDON, Nov 1 (Reuters) - The euro tumbled to a two-week low
on Friday after a plunge in euro zone inflation left markets
suddenly eyeing the possibility of an interest rate cut by the
European Central Bank next week.
    European shares saw a subdued end to what looked to
be a fourth week of gains, but the combination of Thursday's
surprise dive in inflation to just 0.7 percent and a revitalised
dollar kept the main focus on the fragile euro.
    After its biggest fall in six months in the previous
session, the shared currency shed a further 0.6 percent to
$1.3513, leaving it flirting with its biggest weekly drop since
July last year. 
    "It is clear that there has been a major sentiment change on
the euro," said John Hardy, head of FX strategy at Saxo bank in
Copenhagen.
    "The ECB's single mandate has always been on inflation so
this gives Draghi and co further reason to do something at next
week's meeting. We see considerable further downside, the likes
of euro/dollar back into the old range, down towards $1.30."    
    A handful of big banks including UBS, RBS and Bank of
America/Merrill Lynch revised their calls saying they now expect
a rate cut next week and the pressure on the euro increased
after banks made their biggest repayment of ECB crisis loans
since April. 
    The move was also amplified as the dollar continued
to kick away from a recent nine-month low, boosted by upbeat
U.S. data overnight that added to the debate on future Fed
stimulus.
    U.S. S&P E-mini futures edged up about 0.2 percent,
pointing to a slightly higher start on Wall Street, after the
S&P 500 Index closed down about 0.4 percent on Thursday
but still gained 4.5 percent for the month.     
    Stock markets across Europe were between flat and down 0.5
percent,    ahead of the
U.S. restart, pegged back by signs of third-quarter weakness at
some major European firms.
    At the same time, the return of bets on an ECB rate cut saw
euro zone government bonds extend this week's gains. 
      
   
       
    TAPER TALK
    Markets' focus remains heavily on U.S. monetary policy and
how soon the Federal Reserve will begin tapering back its $85
billion a month support programme, having delayed a move in
September.
    The ISM survey of manufacturing for October will give
investors the latest temperature reading on the state of the
U.S. economy after some upbeat PMI data on Thursday.
    "If the ISM report is better than expected, it could add to
revived tapering expectations, and U.S. yields and the dollar
could go up and stocks could go down," said Masashi Murata,
senior currency strategist at Brown Brothers Harriman in Tokyo.
    Not all players are convinced that this week's U.S. newsflow
heralds a shift in monetary policy expectations, given the
disruption caused by last month's Federal shutdown.
    "The existence of noise in the October data will likely make
it difficult for the Fed to gather enough evidence to start
tapering in December," strategists at Barclays said in a note.
    
    CHINA REASSURES
    In Asian trading, reassuring signals on China's factory
activity offered support to the region's markets
, though Tokyo's Nikkei finished at a
one-week low as the yen strengthened against the euro.
    Among commodities, gold dropped to $1,313 an ounce
leaving it at its lowest in nearly two weeks, hurt by sharp
losses in the previous session from month-end profit-taking, the
strong U.S. economic data and the higher dollar.
    Copper got a lift from the China data, rising to
$7,282 a tonne and back toward a one-week peak of $7,300 hit on
Thursday. But it was not enough to help oil, with Brent 
falling back to $107.8 a barrel as U.S. crude slid to
$95.72.
    "There were reports that some of the ports in Libya were
reopening and any signs that that oil is coming back online is
going to hit the oil price," said Abhishek Deshpande, oil market
analyst for Nataxis in London.
    "There are also signs of generally lower season demand for
oil at the moment as China's refineries go into maintenance."