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By Jamie McGeever
LONDON, March 28 The euro slid to a three-week
low and government bond yields across the euro zone fell on
Friday as a surprise fall in Spanish inflation bolstered
investors' bets the European Central Bank will ease policy next
week to ward off the threat of a sustained bout of deflation.
Spanish and Italian borrowing costs fell to their lowest in
eight years, while stock markets drew support from the renewed
potential for looser ECB policy and reports Beijing could fast
track infrastructure spending to boost the Chinese economy.
The 0.2 percent annual rate decline in Spanish consumer
prices this month was larger than expected and the weakest
figure since October 2009.
The Spanish numbers put preliminary German inflation data
for March later in the day under even greater scrutiny for signs
that the threat of deflation is spreading from peripheral euro
zone economies like Spain to the bloc's powerful core.
"This is an ECB expectations-driven story," said Ralf
Umlauf, an analyst at Helaba Landesbank Hessen-Thueringen. "The
market is definitely positioning for next week's meeting. Market
players are expecting some action - any kind of action."
The euro hit a three-week low of $1.3704, falling
further back from the $1.40 level many analysts think would be
too strong for the fragile euro zone economy in the eyes of ECB
At 1125 GMT it had recovered some ground to trade little
changed on the day at $1.3735.
Spanish and Italian yields were flat on the day around 3.24
percent and 3.3 percent, after having
slipped earlier to eight-year troughs of 3.2 percent and 3.27
Portugal's 10-year yield dipped below 4 percent
for the first time in over four years.
The ECB sets policy on Thursday next week, when it will have
the euro zone-wide flash inflation estimate for March due on
Monday. Economists expect that to slip to just 0.6 percent, well
below the ECB's target of below but close to 2 percent.
Europe's main equity markets were all higher, posting early
gains of up to four fifths of percent.
The FTSE Eurofirst 300 index was up 0.4 percent at
1327 points, on for its fourth straight day of gains as
investors square positions at the end of the quarter.
After the respective eight and six percent gains of the
previous two quarters, equity investors have been much more
cautious in the first three months of the year. The FTSE
Eurofirst 300 is on track for a gain of around 1 percent.
Europe followed Asia and emerging markets higher on the back
of comments from China's Premier Li Keqiang, who was quoted by
state media as saying the government would roll out targeted
measures step-by-step to aid the economy.
"We're making a little bit of a jolt higher, based on hopes
of some form of Chinese fiscal stimulus, but that's not the big
game in town. The big question for China is whether it can
deflate its credit bubble without creating a burst," said Jeremy
Batstone-Carr, analyst at Charles Stanley.
"The bounce we're seeing today is a short-term effect."
MSCI's index of Asia-Pacific shares outside Japan
added 0.7 percent and Japan's Nikkei
closed at a three-week high of 14,696 points ahead of the end of
their financial year on March 31.
Emerging markets showed signs of recovering from a bruising
few weeks, with hopes of further Chinese stimulus pushing with
the military and geopolitical tensions surrounding Russia and
Ukraine further into the background.
"The prospect of an economic rebound (in China) is likely to
be priced into markets as policy support is announced. If so ...
it seems plausible that H1 2014 will mark the low water point in
emerging market equity performance," wrote Barclays in a note to
The MSCI index of emerging shares has climbed for
six straight sessions to the highest since January 3. The index
for Latin America on Thursday boasted its
biggest daily gain since July 2012 as Brazilian markets rallied.
In U.S. bond markets, Treasury yields were capped by the
fall in European bond yields. Ten-year U.S. borrowing costs
hovered around 2.68 percent, a couple of basis
points above Thursday's 11-day low.
Gold looked to snap its broad losing streak this month,
rebounding from Thursday's six-week low to trade up 0.4 percent
on the day at $1,295.00 an ounce.
In the oil market, U.S. crude futures were almost flat on
the day at $101.43 a barrel.
(Reporting by Jamie McGeever, Marius Zaharia and Alistair
Smout; Editing by Toby Chopra)