GLOBAL MARKETS-ECB easing bets push euro to 3-month low

Fri May 23, 2014 7:33am EDT

(Recasts with euro falling to 3-month low, updates prices, adds
comments)
    * Euro sinks as weaker than forecast German data boosts ECB
rate cut bets
    * Wall Street expected to see steady start
    * Little impact of ratings upgrades for Spain and Greece
    * Investors wary ahead of Ukraine vote, European result
    * Thai coup only mild distraction for Asia shares

    By Marc Jones and Jamie McGeever
    LONDON, May 23 (Reuters) - The euro fell to a three-month
low against the dollar and stocks and bonds in the region
climbed on Friday, after a wobble in German business confidence
added to expectations the European Central Bank will cut
interest rates next month.
    Asian shares had also finished the week strongly, hitting
one-year highs, while benchmark U.S. and European bond yields,
which move inverse to prices, were heading for rises after a
week lacking in clear direction in terms of data and sentiment.
    Mario Draghi and his ECB colleagues have been sending clear
signals in recent weeks that a rate cut plus a few other
unconventional measures are on the cards for next month.
    A weaker-than-expected reading from Germany's
closely-watched Ifo business climate index as it fell to its
lowest level of the year was enough to convince many ECB action
was now a nailed-on certainty.  
    The euro was down a third of 1 percent on the day at $1.3621
, the lowest in three months and crucially below a
technical support level of $1.3636 that had held firm for almost
nine months.
    It's a level the single currency has flirted with three
times this week but has not closed below it. This could be the
first day it has done so since September last year.
    "The renewed fall in the Ifo in May suggests that the German
recovery may be slowing. We expect annual GDP growth of about 2
percent this year and next, which will not be strong enough to
drive a rapid recovery across the euro zone or to eradicate the
threat of deflation," said Jennifer McKeown, senior European
economist at Capital Economics.
     Sovereign credit ratings upgrades on Friday for Spain and
Greece had little impact on European markets as their respective
economies have been improving for some time 
 
    Investors were also reluctant to take on too much risk ahead
of European election results and a presidential election in
Ukraine this weekend, and because British and U.S. markets are
closed on Monday, which will dry up market liquidity.
    "In places like Italy and Greece we don't have properly
elected governments, they are just cobbled together, so this
weekend's results will play on people's minds," said Marc
Ostwald, a strategist at Monument Securities.
    
    NEGATIVE FEELINGS
    Share markets in Europe suffered a soft start but the ECB
expectations had helped them recover by midday and U.S. futures
 pointed to Wall Street starting steady. 
    The FTSEuroFirst 300 index of leading European shares was
little changed at 1,365 points, Germany's DAX 
was up 0.2 percent at 9,743 points while Britain's FTSE 100
 was down 0.2 percent at 6,801 points.
    Estonia's ECB member Ardo Hansson on Friday echoed Germany's
Jens Weidmann in backing the idea of charging banks a penalty if
they stockpile spare cash at the ECB, a move designed to
encourage them to use it instead to lend to firms and consumers.
    "Negative interest rates (on ECB deposit facility) are not
completely uncharted territory as some of the smaller countries
have done this. The fact that it has been tried elsewhere makes
you a bit more comfortable," Hansson said in an interview.
 
    Earlier in Asia, MSCI's broadest index of Asia-Pacific
shares outside Japan was up 0.1 percent at
487.70 after hitting a one-year high of 488.42. 
    Markets were only mildly distracted by news that Thailand's
military had seized power in a bloodless coup late on Thursday,
pitching the nation into a further period of uncertainty as the
long drawn out political crisis shows no signs of resolution.
    The Nikkei climbed 0.9 percent as the yen remained
on the back foot against the dollar. The Japanese index gained
about 2.7 percent this week, notching its first weekly gain in
three.
    
    ELECTIONS
    Investors also felt a sense of relief getting through the
week without serious market ructions from the crisis in Ukraine
as it, like Europe, also gears up for elections over the
weekend. 
    Russian shares were sitting just off a 3-month high
after a fourth week of gains. U.S Treasury debt yields slipped 1
basis point on the day to 2.54 percent but were
still up almost 5 basis points on the week following the recent
slide to multi-month lows below 2.50 percent.
    Against the backdrop of this weekend's European elections
where Eurosceptic parties are expected to make gains, Italian
10-year yields were on track for their biggest weekly rise in a
year, albeit from recent multi-year lows.
    The dollar traded a shade higher at 101.93 yen, and
has gained about 0.2 percent on the week. Though the rise is
modest, it is still poised to snap a four-week losing run versus
the yen.
    Benchmark three-month nickel futures at the London Metal
Exchange (LME) looked set to pocket a 3.5 percent weekly
gain, building on the year's stellar advance after a shutdown of
Indonesian supply, while Brent oil and gold were
steady after largely quiet weeks.

 (Reporting by Jamie McGeever, additional reporting by John
Geddie in London; Editing by Alison Williams; To read Reuters
Global Investing Blog click here;
 for the MacroScope Blog click on blogs.reuters.com/macroscope;
 for Hedge Fund Blog Hub click on blogs.reuters.com/hedgehub)
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