CORRECTED-GLOBAL MARKETS-Italian leadership squabble weighs on shares; rally fades

Thu Feb 13, 2014 12:37pm EST

(Corrects to show rally was 6 days.)
    * Shares drop after 6-day rally, Italy politics weigh in
Europe
    * Gold back on front foot after hitting 3-month high
    * Investors look for more proof of solid U.S. growth
    * Wall Street expected to open 0.5 pct lower

    By Marc Jones
    LONDON, Feb 13 (Reuters) - World shares stepped back from
three-week highs on Thursday, ending a six-day run of gains
fuelled by assurances from major central banks their supportive
policies would continue.
    In Europe, the fading momentum was compounded by political
uncertainty in Italy, where Prime Minister Enrico Letta defied
pressure to make way for the centre-left leader Matteo Renzi.
 
    The stand-off threatens to pull apart a coalition government
patched together after last year's deadlocked elections. That
would further hamper efforts to turn around the country's
sputtering economy.
    Italian stocks led the losses among the region's
bourses, dropping as much as 1.2 percent. The country's
government bonds were the worst performers on the
debt market.
    "Right now, you are not sure which (political) scenario will
be in play and some of the scenarios could lead to inaction,"
said UniCredit strategist Luca Cazzulani in Milan.
    A batch of disappointing updates from blue-chip companies in
Europe also weighed on the region's stock markets but it was the
rumblings in Italy that remained the central focus. 
    There was no signs of trouble in a 7.5 billion-euro auction
of Italian 3- to 30-year bonds. But the relief
was short-lived - stocks and bonds in Milan remained rooted to
the bottom of the European table.
    Letta, a low-key moderate appointed to lead the cross-party
coalition formed after last year's deadlocked elections, is
fighting for his political future amid growing criticism from
Renzi over the slow pace of economic reform.
    A meeting of the 140-strong leadership committee of the
Democratic Party at 3 p.m. (1400 GMT) will decide whether he has
the backing of his party or will be forced out less than a year
after taking office.
    
    EMERGING CONCERNS
    Among still-jittery emerging markets, Ukraine's ongoing woes
saw the hryvnia and its sovereign bonds tumble. In Nigeria,
Africa's second-biggest economy, fresh government sackings left
the naira near a two-year low. 
    U.S. Treasury yields, the benchmark for global
borrowing costs, added to the general pressure. They hovered
near a two-week high at 2.75 percent, well above the 2.57
percent where they were trading just over a week ago. 
    Asian trading was also bumpy after Wall Street stumbled
overnight. U.S. stocks are expected to fall roughly 0.5 percent
when trading resumes later on Thursday. 
    Markets are still sitting on solid gains. Shares had rallied
amid relief that Federal Reserve policy would continue unchanged
and hints the European Central Bank may provide more support in
the euro zone.
    MSCI's broadest index of Asia-Pacific shares outside Japan
 lost 0.7 percent after jumping 4.5 percent in
the previous five sessions. Japan's Nikkei fell 1.8
percent, but that too was after a 4.6 percent surge this week.  
 
    Janet Yellen's appearance in front of a Senate banking panel
scheduled for later has been postponed because of bad weather
. But she made it clear on Tuesday, in her first
public remarks since becoming Fed chair, that she would not make
any abrupt changes to monetary policy. 
    Adding to the positive mood, Congress approved legislation
on Wednesday to increase the U.S. government's debt limit for a
year, avoiding a repeat of the government shutdown in October.
 
   
    
    DATA WOBBLES
    In the currency market, the dollar was on the back
foot. The British pound continued to shine after a surprisingly
upbeat economic outlook from the Bank of England on Wednesday
that encouraged bets on an early 2015 rate hike.
    Sterling edged up to $1.6640, near the 2 1/2-year
high of $1.6667 it hit late last month. 
    The euro recovered to $1.3667, after tumbling on
comments by ECB Executive Board member Benoit Coeure on
Wednesday. Coeure told Reuters that cutting the ECB's deposit
rate to negative figures -- in effect,  charging banks to park
spare cash at the central bank -- was "a very possible option"
that the ECB was looking at seriously. 
    "Coeure's comments cannot be lightly dismissed and stoke
expectations for action at the March meeting," said Sean Callow,
a currency strategist at Westpac in Sydney.
    The other big move among the majors was the Australian
dollar. It tumbled around one percent, dipping as far
as $0.8928, after Australian unemployment hit its highest in a
decade, reviving rate-cut speculation. 
    As risk assets took a back seat, oil prices fell. U.S. crude
futures slipped back under $100 a barrel after dropping 1
percent from Wednesday's four-month high. Safe-haven gold was at
$1,293, after racing to a three-month high of $1,295.91
the day before.
    Recent U.S. data, including two straight months of weak jobs
growth, have raised questions over whether the world's biggest
economy can sustain the strength it showed in the second half of
last year.
    "There are emerging doubts about whether you can just blame
all the soft data on the weather," said Norihiro Fujito, a
senior investment strategist at Mitsubishi UFJ Morgan Stanley
Securities, referring to the recent U.S. cold snap.
    "Investors are a bit bewildered. While they are relieved
that major events are out of the way, they are still hesitating
to chase shares higher."    
    Next up on the data front are January retail sales and
weekly jobless claims data, both due at 1330 GMT.

 (Additional reporting by Hideyuki Sano in Tokyo and Ian Chua in
Sydney; Editing by Larry King)