GLOBAL MARKETS-Euro yields at record lows as economy falters; stocks up

Thu Aug 14, 2014 8:07am EDT

(Repeats to add headline tag)

By Sujata Rao

LONDON Aug 14 (Reuters) - Bond yields dropped to record lows across the euro zone on Thursday and the euro hovered near its weakest in nine months after Germany reported its economy shrank in the second quarter, fuelling expectations of more central bank stimulus.

The chance of more action from the European Central Bank helped equity markets to recoup some of their early losses. So did remarks by Russian President Vladimir Putin, who said his country did not want conflict with the outside world .

U.S stock futures signalled a stronger opening on Wall Street.

Germany said its gross domestic product shrank by 0.2 percent during the April-May period. That report came after earlier data showed gross domestic product had fallen in both Italy and Japan, Chinese lending had declined and U.S. retail sales had stalled.

In addition, the French economy failed to expand for a second straight quarter. Growth in the euro zone overall was flat in the second quarter, weaker even than the 0.1 percent expansion that had been forecast.

"Disappointing euro area growth and intensifying disinflation pressures increase the pressure on the ECB for further action in coming months," said Nick Stamenkovic, a strategist at RIA Capital Markets in Edinburgh.

"If the economy disappoints in the second half then the pressure on the ECB to start QE (money-printing) in early 2015 will intensify."

Those expectations pushed German 10-year yields to record lows below 1 percent, with traders reporting that the yield had touched 0.998 percent. French yields fell as well, to 1.392 percent, also a record low. Spanish bond yields reached record lows as well, dropping to 2.42 percent

The euro meanwhile hovered near nine-month lows against the dollar.

Sterling also struggled, declining to a four-month low of $1.6657 after the Bank of England surprised investors by signalling it was in no hurry to raise interest rates. The pound has dropped almost 3 percent since climbing to six-year high in the middle of July.

Morgan Stanley's head of European currency strategy, Ian Stannard, said economic weakness would keep the single currency under pressure. U.S. data by contrast is relatively encouraging, making it more likely the Federal Reserve will raise interest rates next year.

"That highlights the divergence we're seeing in the G10, with disappointing data coming from most countries with the exception being the United States, and that's going to keep the dollar supported across the board," Stannard added.

The potential effect on energy demand of lacklustre European growth lingering worries about China kept oil prices near 13-month lows. Brent crude futures fell 69 cents to $103.6 per barrel.

Despite the weak growth expectations, the prospect of more stimulus encouraged some equity players.

World stocks inched to one-week highs while Europe's FTSEurofirst 300 index and Frankfurt's DAX rose 0.3 percent and 0.5 percent respectively .

France's CAC index also rose half a percent after opening the day's trade 0.5 percent in the red.

U.S. stock index futures edged higher, with S&P 500 e-mini futures rising 3 points. Dow Jones industrial average e-mini futures rose 24 points and Nasdaq 100 e-mini futures added 5.75 points.

Markets now await U.S. weekly jobless claims, due at 1230 GMT for a check on the state of the labour market recovery. (Editing by Larry King)

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article