GLOBAL MARKETS-U.S. data, prospect of ECB easing feed risk appetite

Wed May 28, 2014 8:40am EDT

* Risk appetite up, S&P 500 expected to extend record highs
    * European shares, bonds tread water after gains of last few
days
    * Gold steadies at 3 1/2-month low as safe-haven appeal dims
    * Euro at 3-month low as lending data back case for rate
cuts

    By Marc Jones
    LONDON, May 28 (Reuters) - Strong economic data in the
United States shored up world stocks on Wednesday, as record
highs for U.S. and German markets whetted appetites for risk and
dragged safe-haven gold to a 3 1/2-month low.
    Wall Street was expected to add a few more points when
trading resumes. The S&P 500 could set a third straight
record high and U.S. bond yields, a benchmark for
borrowing costs globally, look set to stay low.
    European markets were happy to take a breather after two
days of gains, as they digested new credit and bank lending
figures from the European Central Bank that bolstered the case
for rate cuts next week.
    German two-year bond yields, the most sensitive to ECB
interest rate moves, hovered at a 6 1/2-month low and Spain's
hit new record lows. The DAX stock index did a little
better than Europe's other main markets, adding a few
more points to Tuesday's record high. 
    The ECB's lending data showed credit to companies fell 1.8
percent on an annual basis in April. That was less than its
decline in March but still evidence of sluggish lending in the
euro zone. 
    The data reinforce the case for a reduction in the ECB's
base rate, already at a record-low 0.25 percent, said Jan von
Gerich, the chief developed markets strategist for Nordea in
Helsinki, but markets may need bolder action to rise further.
    "Unless they (ECB) significantly exceed expectations, the
meeting is likely to be a trigger for core euro zone yields to
rise," von Gerich said. "That is my main assumption. It has
often been the case in the past ... buy the rumour, sell the
fact."
    In the currency market, the euro and sterling
 were both under pressure from a stronger dollar 
at $1.3610 and $1.6752 respectively. The euro decline took it to
a 3-month low. 
     China's yuan  was the big mover. End-of-month
trading compounded concerns about an economic slowdown led by
the property market, leaving the currency flirting with an
18-month low. 
    "There is a lot of negative news around the property sector
and that is hurting the currency and we may see more weakness
unless there is more evidence of an economic turnaround," said a
senior strategist at a European Bank in Hong Kong who requested
anonymity.
 
    
    GOLD SLIDES
    Riskier asset markets rose overnight after the United States
reported an unexpected rise in durable goods orders in April and
higher home prices for March. Service industries, which dominate
the economy, grew at a rapid clip in May. 
    MSCI's broadest index of Asia-Pacific shares outside Japan
 rose to a one-year high of 490.15. Tokyo's
Nikkei ticked up 0.4 percent and MSCI's 45-country world
index approached an all-time high.
    "The bullish U.S. indicators have set the positive tone for
investors, who are basically using this week to prepare for next
week's ECB meeting," said Cho Byung-hyun, an analyst at Tong
Yang Securities in Seoul.
    Back in Europe, the ECB lending gloom was offset by
better-than-expected data on euro zone economic sentiment and
the first rise in inflation expectations this year. They boosted
hopes of a stronger economy that can keep the region out of
deflation. 
    The positive sentiment eroded the safe-haven appeal of gold,
which extended overnight losses to a 3 1/2-month low.
 Spot gold slipped to a low of $1,260.74
an ounce, its weakest since Feb. 7, before steadying in Europe
at $1,267 
    The dollar shrugged off a slide by U.S. Treasury yields to
back below 2.50 percent. It held near an eight-week high against
a basket of major currencies and fetched 101.93 against
the yen, within striking distance of the two-week high of
102.145 it got to on Tuesday.
    Brent crude held above $110 a barrel as the upbeat
U.S. data brightened demand prospects from the world's largest
economy. Geopolitical risk in Libya and Ukraine added support.
 
    Uneasy calm returned to the streets of Donetsk on Wednesday,
which saw the biggest battle of a pro-Russian separatist
uprising in eastern Ukraine. More than 50 people were killed,
according to pro-Moscow rebel fighters. 
  

 (Additional reporting by Saikat Chatterjee in Hong Kong and
Shinichi Saoshiro in Tokyo; Editing by Larry King)
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