GLOBAL MARKETS-Euro zone PMIs, caution ahead of ECB cool risk appetite

LONDON, April 3 Thu Apr 3, 2014 7:36am EDT

LONDON, April 3 (Reuters) - Slightly slower growth in euro zone business activity last month and caution ahead of Thursday's European Central Bank policy decision halted this week's European stock market rally in its tracks.

Investor appetite for risk did show up in some areas, however, with long-term Greek government borrowing costs falling below 6 percent for the first time in four years ahead of the country's expected return to the bond market later this month.

Signs of a post-winter improvement in the U.S. economy, expectations Beijing will take steps to boost the Chinese economy and a reduction in emerging market volatility had lifted global stocks and core government bond yields this week.

On Wednesday the S&P 500 hit a record high and Asian stocks a four-month peak, while benchmark U.S. 10-year Treasury yields hit a one-month high and Greek 10-year yields posted their biggest one-day fall in two months.

The global focus on Thursday switched to Europe. Purchasing managers index data showed that growth in euro zone business activity slowed in March but was solid over the quarter.

Seventy of 72 economists polled by Reuters expect the ECB to keep interest rates on hold at a record low 0.25 percent. But with inflation at a four-year low of 0.5 percent, the door is open to further easing, if not today then in the coming months.

"Risk assets in Europe are broadly flat. The main news in Europe was the PMI reports (and) the final euro area indices for March were a tad lower than expected," said Barclays economists in a note to clients.

"Market attention will now shift to the ECB policy decision and press conference. While we do not expect a policy change today, the risks are finely balanced," they said.

At 1110 GMT all of Europe's major indices were flat on the day. The FTSE Eurofirst 300 index of leading European shares was at 1,343 points, Britain's FTSE 100 index was at 6,658 points, Germany's DAX was trading at 9620 points and France's CAC 40 was at 4431 points.

DRAGHI DISAPPOINTMENT DANGER

Overnight, MSCI's broadest index of Asia-Pacific shares outside Japan added 0.1 percent, brushing a new four-month high, and Japan's Nikkei jumped 1.2 percent to a three-week peak after China cut taxes for small firms and updated infrastructure spending plans.

In bond markets 10-year German government bond yields inched up a basis point to 1.63 percent and Greek yields slipped to a fresh four-year low of 6.16 percent.

Greece lined up a group of banks on Thursday to manage its first new bond sale since the country restructured its debt two years ago. The transaction, expected later this month, will mark one of the fastest-ever comebacks for a defaulted sovereign.

France and Spain sold a combined 13.1 billion euros of bonds on Thursday in auctions that drew strong demand from investors.

In currencies, the yen remained on the back foot as its safe-haven appeal continued to fade. The dollar traded at 103.95 yen, after briefly touching a 10-week high of 104.075.

The euro slipped 0.1 percent to $1.3753 against the dollar, as traders bet on an outside chance the ECB will act.

"The danger of at least minor disappointment today is real, though Mr. Draghi's press conference will doubtless leave the door open to further easing should deflationary pressures grow," SocGen analysts said, referring to ECB president Mario Draghi.

Sterling slid 0.2 percent to $1.6590 as a fall in UK service sector growth to an eight-month low in March offset earlier remarks from Bank of England governor Mark Carney that interest rates could rise before May next year.

Beyond the ECB meeting investors will be looking to U.S. employment data for March on Friday. Private-sector jobs and factory orders data on Wednesday strengthened expectations of another solid report.

In commodities markets, gold fell 0.5 percent to $1,283 an ounce, three-month copper on the London Metal Exchange was down 0.75 percent at $6,625.00 a tonne, and Brent oil was flat at $104.77 a barrel. (Reporting by Jamie McGeever; Editing by Toby Chopra)