September 4, 2012 / 7:35 AM / 5 years ago

GLOBAL MARKETS-ECB hopes cut Italy, Spain bond yields, support euro

6 Min Read

* Markets await details of ECB bond-buying plan

* Euro hovers near eight-week highs on hopes of decisive action

* Equities seen vulnerable to disappointment. U.S. stocks seen lower

* Gold and oil gain on wider central bank stimulus hopes

By Richard Hubbard

LONDON, Sept 4 (Reuters) - Spanish and Italian government bond yields fell on Tuesday, and the euro hovered near an eight-week high after the head of the European Central Bank hinted at the scope of a much-anticipated bond buying programme.

The ECB is expected to unveil a new debt-purchasing scheme to tackle the region's debt crisis at a policy meeting on Thursday, when it may also cut interest rates as the 17-nation euro area heads towards a recession.

The bank's president Mario Draghi told European lawmakers on Monday that buying short-term sovereign debt did not breach any European Union rules, which investors took as a sign the bank would resume purchases of short-dated Spanish and Italian bonds.

"Markets are taking a bit of confidence from Draghi, who apparently indicated that purchases of up to three years maturity wouldn't be in contravention of EU policies on financing of sovereigns," said Brian Barry, a strategist at Investec.

Spanish two-year yields dropped to a three-week low of 3.23 percent as investors welcomed Draghi's comments, while their Italian counterparts fell 26 bps to 2.45 percent. The cost of insuring against Spanish and Italian defaults also fell sharply.

The single currency was little changed at $1.2590, close to a high of $1.26378 posted last Friday, its strongest level since early July.

Equity Caution

European shares were lower, however, having already risen strongly on hopes that central bank action could start the fightback against the euro zone's chronic debt problems.

U.S. stock index futures also pointed to a lower opening on Wall Street when trading resumes after the Labor Day holiday.

European equity investors have turned more cautious over the impact of the ECB plan, having enjoyed a strong rally since Draghi pledged on July 26 to do "whatever it takes" to protect the euro from the crisis.

The FTSEurofirst 300 index of top European stocks, which has risen by 7 percent since late July, was down 0.7 percent at 1,084.35 points by midday.

"If the ECB disappoints, the reaction would be on the negative side, but I don't expect a dramatic sell-off as focus will shift to other events," said Christian Stocker, equity strategist at UniCredit.

The MSCI world equity index, which has gained since Friday on renewed hopes of more monetary stimulus by the U.S. Federal Reserve, was down 0.2 percent at 321.98 points.

Meanwhile the cautiously upbeat tone in peripheral euro zone bonds and a warning by Moody's that the EU's Aaa credit rating was under threat knocked German government bond prices lower.

German 10-year yields were up 3 basis points at 1.41 percent, but traders said they did not expect sharp moves before the ECB meeting on Thursday.

Fed Action

If the ECB plan is viewed positively by investors, attention will likely turn quickly to the Fed's policy meeting next week, when it could also consider another round of bond buying to help reinvigorate a fragile recovery in the domestic economy.

The U.S. Institute for Supply Management's manufacturing data due later could support speculation of a Fed move if it reflects similar surveys out of Europe and Asia on Monday that showed factory activity slowing around the world.

Friday's August U.S. non-farm payrolls report will also be crucial to hopes of an easing.

The growing speculation of action by central banks, which has included talk the People's Bank of China could act as growth in the world's No. 2 economy tapers off, was also helping oil and precious metal prices on Tuesday.

Brent crude was up for a fourth day at $166.42 a barrel and near a three-week high. U.S. crude futures were up 70 cents at $97.17 a barrel from Friday's settlement.

"The main driver at the moment is the expectation around an ECB announcement on Thursday - investors are looking for some indications of more bond buying," said Filip Petersson, Commodity Strategist at SEB Commodity Research.

"They are also looking to see if the U.S. non-farm payrolls on Friday will be bad enough to keep the door open for QE3 (monetary easing)," he said.

The gold price, which has enjoyed more dramatic gains on growing speculation over central bank stimulus measures, was nearing a six month high at $1,693.30 an ounce.

Investors have been piling into both gold and silver as a hedge against inflationary pressure from central banks' pumping money into the global economy.

Spot silver, which serves as both a precious and an industrial metal, has risen nearly 10 percent in two weeks, outstripping the 4 percent gain in gold in the same period.

But the slowdown in China, which is a major driver of demand for all industrial commodities, was hurting the copper market, with 3-month futures on the London Metal Exchange down 0.1 percent at $7,668 per tonne.

China's vast manufacturing sector has been badly hit by slowing new orders from many of its export markets, especially the euro zone, raising fears growth will weaken well into the third quarter.

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