GLOBAL MARKETS-Euro recovers on factory data but ECB move key

Mon Nov 4, 2013 10:56am EST

* Wall Street opens higher, market looks to build on gains

* ECB meeting, U.S. jobs report to dominate week

* Euro off 6-week low, shares firm on solid factory data

* ECB seen flagging policy easing

* Gold, oil seen vulnerable to Fed tapering expectations

By Steven C. Johnson

NEW YORK, Nov 4 (Reuters) - World stock markets rose on Monday, with the S&P 500 poised to extend a four-week winning streak, while robust European manufacturing data helped the euro recover from a six-week low.

At the same time, a report showing a drop in U.S. business investment in September clouded views on when the Federal Reserve will start withdrawing its stimulus spending.

A decline in euro zone inflation left investors bracing for still easier monetary policy in the 17-country group, with some believing the European Central Bank could reduce its benchmark rate when it meets later this week.

Even an acceleration in European factory production last month was not enough to dash those expectations, as the sector remained fragile compared with historical levels.

"The bias remains for (the ECB) to ease, as markets drive the ECB to address disinflationary pressures," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

The euro was last up about 0.2 percent at $1.3505 while Europe's broad FTSEurofirst 300 index added half a percent and was closing in on last-week's five-year high.

Predicting the U.S. Federal Reserve's next move has proved a bit trickier. Upbeat U.S. factory data last week stirred talk that it could start winding down its stimulus program as soon as next month rather than waiting until March. That has supported the U.S. dollar and limited oil price gains.

But St. Louis Fed President James Bullard on Monday said the central bank need not rush because inflation remains low.

Another top Fed official, Dallas Fed President Richard Fisher, said political wrangling over the budget, which closed the U.S. government for 16 days last month, has made the Fed's job more difficult.

The Commerce Department said on Monday that new orders of non-military capital goods other than aircraft, an indicator of business spending plans, fell 1.3 percent during the month.

"Whether it happens in December or the next several months, investors are keenly aware that it will happen and at some point that dynamic will end," said Andre Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New Jersey.

The Fed's stimulus has been a boon for Wall Street over the last few years; the benchmark Standard & Poor's 500 index is up nearly 24 percent this year and last week closed at a record high.

The S&P 500 was last up 3.90 points, or 0.22 percent, at 1,765.54. while the Dow Jones industrial average was up 19.55 points, or 0.13 percent, at 15,635.10. The Nasdaq Composite Index was up 9.36 points, or 0.24 percent, at 3,931.40.

U.S. government bond prices rose slightly, with the 10-year note up 8/32, to yield 2.59 percent.

A weekend report pointing to expansion in China's giant service sector did little to invigorate Asian markets. MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.2 percent while Tokyo markets were closed for a holiday.

The MSCI world equity index, which tracks shares in 45 nations, was 0.3 percent higher, while an index of European stocks gained 0.5 percent.

U.S. GROWTH OUTLOOK, ECB'S CHOICES

The overall global growth picture should get clearer later this week with Friday's release of the U.S. October payrolls report. Economists are betting uncertainty over the partial government shutdown last month held hiring to a modest 125,000.

If that resulted in a higher jobless rate, the Fed might be inclined to wait until next year to ease up on its stimulus.

Spot gold prices rose $5.56, or 0.42 percent, to $1,320.30, while oil prices steadied following last week's losses on ample supply.

Brent crude for December delivery was unchanged at $105.89 a barrel. U.S. oil for December delivery was 19 cents firmer at $94.80.

In fixed income markets, bets on lower euro zone interest rates lifted both core and lower-rated euro zone bonds, though analysts debated over which policy tool the ECB might choose to use.

In addition to a cut in its main refinancing rate, now at 0.5 percent, the ECB could reduce the deposit rate to below zero, which would have a bigger effect on money markets. It may even promise another long-term refinancing operation to ensure banks have plentiful liquidity. [ID:nL5N0IN04N}

"I'd be surprised if they don't do something before year-end," said Simon Smith, chief economist at FXPro. "On balance, I'd be thinking they were more likely to do something on the liquidity side where it would be more effective."

The Bank of England will hold a policy meeting on Thursday and is expected to stay on hold following a run of improving UK economic data.