GLOBAL MARKETS-European policy outlook shifts hit sterling, yields

Wed May 14, 2014 8:46am EDT

* BoE in no rush to raise rates; sterling hits 1-month low
vs dollar
    * Sources say ECB preparing rate cut, other measures next
month
    * Lower rate outlook fails to lift European shares

    By Jamie McGeever
    LONDON, May 14 (Reuters) - Sterling and top-rated government
bond yields fell on Wednesday after the Bank of England said it
was in no rush to raise interest rates, cooling market
expectations that the first rate hike by a major central bank
could come later this year.
    Sterling had touched a 16-month high against the euro before
the release of the BoE's quarterly inflation report but quickly
reversed course and slipped to a one-month low against the
dollar. 
    Cooling UK rate hike expectations dovetailed with the
growing belief that the European Central Bank will ease policy
in some form next month, most likely with a rate cut, pushing
down UK, European and U.S. bond yields.
    The yield on benchmark 10-year U.S. Treasuries fell to a
six-month low of 2.58 percent and the comparable
yield on German Bunds fell to a one-year low below 1.40 percent
EU10YT=-RR.
    "I don't think the BoE was necessarily being dovish, but the
market had worked itself up into a bit of a lather that perhaps
the Bank was going to raise interest rates to cool the housing
market," said Steve Barrow, head of G10 strategy at Standard
Bank in London.
    "And what governor Mark Carney said was that that (rate
rise) is the last line of defence," Barrow added.
    At 1200 GMT the euro was up almost half a percent on the day
against sterling at 81.80 pence, recovering from a
16-month low earlier in the day of 81.23 pence.
    Sterling was down a third of a percent against the dollar at
$1.6770, which left the euro up slightly from Tuesday's
five-week low against the greenback at $1.3720.
    In its quarterly report, the BoE lowered its forecast for
unemployment for the next couple of years but left largely
unchanged its growth and inflation forecasts. 
    In his press conference, Carney said there was still too
much slack in the labour market. That was backed up by data on
Wednesday that showed the unemployment rate fell to its lowest
in over five years last month but wage growth stayed below
inflation.  
    UK gilt yields fell to as low as 2.61 percent.
    
    ECB CUT A "DONE DEAL", SAYS SOURCE
    Euro zone sources told Reuters that a rate cut from the ECB
next month is "more or less a done deal" in a package of policy
options including measures aimed at boosting lending to small-
and mid-sized firms. 
    This helped push 10-year Bund yields to a one-year low of
1.38 percent.
    Italian 10-year yields fell back to a record low of 2.90
percent on Wednesday as a sale of longer-dated bonds
in Rome drew robust interest from investors anticipating fresh
ECB stimulus. 
    Plans for the new Italian 15-year bond issue, being sold via
syndication, were unveiled late on Tuesday. Bids for the bond
topped 20 billion euros, according to a lead manager on the
deal. 
    The lower interest rate environment failed to boost European
stocks, which remained near recent multi-year highs but
succumbed to some profit taking.
    Britain's FTSE 100 index of leading shares was down
0.2 percent at 6859 points, edging back from a 14-year high
reached the previous day.
    The FTSEurofirst 300 index of leading European shares was
down a quarter of one percent at 1365 points, hovering
close to Tuesday's six-year high. The FTSEurofirst 300 has risen
some 7 percent from lows in March. 
    Germany's DAX was down 0.1 percent at 9,745 points
after touching 9,771.40 earlier, within reach of its record high
of 9,794 points reached in January.
    "It's not the time to play indexes. The 'easy' rally is
over," said David Thebault, head of quantitative sales trading,
at Global Equities. "Investors have to do their homework now,
dig into balance sheets and pick the right stocks, not whole
countries."
    Asian shares rose to their highest level in more than a
month after the S&P 500 closed at a record high
overnight. MSCI's broadest index of Asia-Pacific shares outside
Japan added 0.8 percent.
    Hong Kong shares were up more than 1 percent as
investors snapped up property and banking stocks after China's
central bank urged mainland banks to speed up the granting of
home loans.
    Japan's Nikkei bucked the trend, slipping about 0.1
percent and moving away from the previous session's 1-1/2-week
high as investors took profits.
    U.S. stock futures pointed to Wall Street opening between
0.1 and 0.2 percent lower  NDc1>.

 (Additional reporting by Blaise Robinson in Paris; Editing by
Susan Fenton; To read Reuters Global Investing Blog click here;
 for the MacroScope Blog click on blogs.reuters.com/macroscope;
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