GLOBAL MARKETS-Euro scales heights, stocks lose grip on gains

Tue Dec 10, 2013 8:33am EST

* Euro 6-week high vs dollar, 5-year high vs yen
    * European shares fail to hold gains, Wall Street seen flat
    * Investors cautious as Fed policymakers talk tapering
    * China data reassures, Ukraine investors worried about
slowdown

    By Marc Jones
    LONDON, Dec 10 (Reuters) - The euro reached a five-year peak
against the yen and a six-week high against the dollar on
Tuesday, as focus grew on the dwindling spare cash in euro zone
banks and the ECB's apparent lack of concern.
    Stocks consolidated some of their gains of the past two days
as caution took over before the Federal Reserve's meeting next
week, amid talk of by some of its policymakers of scaling back
its stimulus programme.
    Wall Street was expected to see another quiet day after the
S&P 500 reached its latest record on Monday.        
    That was the story for Asian and European stock markets.
Germany's DAX, France's CAC 40 and Britain's
FTSE 100 all began to sag after some mid-morning efforts
to rise. 
    Slightly weaker-than-expected French industrial production
had got the day off to a shaky start. Then the equivalent report
from Italy and a small upward revision to its third-quarter GDP
number lifted spirits.
    That kept the euro healthy at $1.3745 after it hit
its highest against the dollar since late October overnight, as
well as a five-year peak against the yen.
    "It is hard to say the euro will weaken unless the ECB does
something," said Laurent Fransolet, an interest rate strategist
at Barclays in London. "The bar for them (to carry out
quantitative easing or other types of aggressive easing
measures) is quite a bit higher compared to the Fed or Bank of
England."
   
 
    MONEY'S TIGHT    
    One factor driving the euro higher is the ECB's balance
sheet. In sharp contrast to the Fed's, it has shrunk 8 percent
this year as banks started paying back the 1 trillion euros in
financing they got at the peak of the euro crisis.
    After the ECB kept rates on hold last week, the bank's head,
Mario Draghi, said he was satisfied with levels in the money
markets. On Tuesday, one of its other top policymakers, Benoit
Coeure, stressed the hurdles to further aggressive easing.
 
    "I don't see need to use spectacular measures, such as
U.S.-style large-scale asset purchases," Coeure said. He added
there would have to be a lot more strings attached if the ECB
ever decided to lend banks more cheap cash.
    Demonstrating exactly how tight things have become in the
money market, banks borrowed an extra 11 billion euros from the
ECB on Tuesday, and it only just managed to get enough back to
offset its controversial sovereign bond purchases of the past.
   
    Excess ECB cash, which has long kept bank-to-bank borrowing
rates pinned down, is down to its lowest level since
late 2011. Banks now must pay more in the market to
get funding, and for the first time since 2008 they face a
premium if they want to swap dollar rate payments into euros
rather than the other way around. 
    
    FED FOCUS    
    Euro zone government bonds were unaffected, however. The
ticked down along with U.S. Treasury yields,
reaching 2.8188 percent in the first flurry of U.S. trade.
    The premium that investors demand to buy Italian or Spanish
government bonds  rather than
ultra-safe German paper also fell to new lows.
    Signs of improvement in the global economy have provided
fitful support to riskier assets in recent weeks, amid
uncertainty over the Fed's plans for tapering off its stimulus.
    A new Reuters poll showed the U.S. central bank was still
expected to start the process in March, but some economists now
say that it might do so as early as this month. 
    Several Fed officials had lent credence to the idea that a
tentative reduction could come soon. St. Louis Fed President
James Bullard said on Monday it might slightly reduce its bond
purchases this month. Dallas Federal Reserve Bank President
Richard Fisher called for tapering to start "soon."
 
    In emerging markets, political upheaval in Ukraine and in
Thailand continued to dominate attention. But broadly positive
data in China, Turkey and South Africa reinforced the picture of
a global economic pickup. 
    On the commodities front, Brent oil was back below
$111 a barrel. U.S. crude edged above $98 per barrel on
expectations of a second weekly drop in U.S. crude inventories.
    Spot gold was just below $1,250 an ounce after
gaining over the past two sessions. The softer dollar helped
copper touch its highest level in a month at is climbed
to 7,160.75 a tonne.
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