August 29, 2014 / 8:45 AM / 3 years ago

GLOBAL MARKETS-Euro lifts, shares drift as ECB easing bets evolve

* Wall Street expect to nudge up after week of record highs
    * Euro off lows as inflation cools bets for ECB cut next
    * Dollar edges up against yen after weak Japanese data
    * Shares head for 3rd week of gains amid Ukraine tensions
    * German Bunds near record lows, money mkt rates sub-zero

    By Marc Jones
    LONDON, Aug 29 (Reuters) - The euro lifted off lows and
European shares sagged on Friday as a new five-year low in euro
zone inflation was viewed as not extreme enough to drive the
European Central Bank back into its increasingly bare policy
    Wall Street was expected to edge back up towards all-time
highs though, suggesting the market's recent upswing remained
intact following this week's strong run of U.S. data and the
view that likely future action from central banks like the ECB
will keep markets well oiled.
    Consumer prices in the 18 countries using the euro rose by
just 0.3 percent year-on-year in August, the lowest since
October 2009 and well below the ECB's preferred level of just
under 2 percent, data showed on Friday.
    But it was also right in line with economists' expectations
and helped cool speculation that the ECB, which meets on
Thursday, would cut rates on its way towards U.S.-style
quantitative easing -- printing money by buying bonds --
following strongly-worded comments from ECB President Mario
Draghi last week. 
    The euro rose to the day's high of $1.3195 against
the dollar, and yields on core euro zone bonds inched away from
record lows as the region's share markets 
also gave back their early gains. 
    "Although Draghi has waved the flag I don't thank there is
enough there (in the inflation data) to instigate another round
of easing," said Bank of Tokyo Mitsubishi currency strategist
Derek Halpenny.
    "In terms of another rate cut, I think they will want to
wait until they can be more certain that inflation expectations
have become unanchored."     
    But together with updated projections from ECB staff, the
inflation data is likely to lead to a lively discussion next
Thursday about whether the bank should accelerate existing
policy measures because of the danger of deflation.
    Overnight, euro zone money market rates dropped
into negative territory for the first time ever. That
essentially means banks are now paying to lend to each other,
and it reflects expectations for a long period of cheap ECB
    German Finance Minister Wolfgang Schaeuble warned on Friday,
however, that the ECB has run out of tools to fight deflation,
having earlier backed French President Francois Hollande's calls
for greater government investment to boost growth.
    Front-running the euro inflation figures, French data showed
producer prices fell 0.3 percent month-on-month in July and 0.6
percent year-on-year. It has a host of reform measures planned
for September likely to push inflation even lower.
    "What is more important for the ECB is inflation
expectations and what is worrying for them is that they have
been going down," said Philippe Gudin de Vallerin head of
European research at Barclays.
    Worries that persistent tensions between Russia and Ukraine
could damage Europe's already-weak recovery remained a concern
for markets.
    The rouble was at an all-time low versus the dollar
in Moscow as Russian stocks  extended a 5 percent
fall this week. Earlier, Asian shares had also felt the strains
as they pulled back from a six-year high.
    Pro-Russia rebels fighting in Ukraine said on Friday they
would comply with a request from the Kremlin and open up a
'humanitarian corridor' to allow the withdrawal of Ukrainian
troops they have encircled.
    It was not clear how the government in Kiev would react to
the offer, but the first word from the Ukrainian military was
negative. It said in a statement that the offer showed that
"these people (the separatists) are led and controlled directly
from the Kremlin".
     NATO Secretary-General Anders Fogh Rasmussen added a
warning that Russian forces were engaged in direct military
operations inside Ukraine in a blatant violation of Ukraine's
    MSCI's broadest index of Asia-Pacific shares outside Japan
 dipped about 0.2 percent and Japan's Nikkei
stock average shed 0.2 percent after a spate of weak
Japan data, bringing its monthly loss to about 1.3 percent.   
    Overall, however, global share markets remain on a hot
streak. Investors are wagering that new stimulus from the ECB,
and possibly also the Bank of Japan before the end of the year,
is likely to keep cheap global funding flowing.
    MSCI's 45-country world share index was on
course for its third straight week of gains after another run of
record highs on Wall Street this week and moves up in Europe and
emerging markets. 
    The high-flying dollar also edged up to 103.91 yen,
as it headed for a seventh straight week of gains versus the
 basket of six major currencies. 
    Among commodities, gold was steady on the day at
$1,285 an ounce after rising for the third straight session
against a backdrop of Ukraine tension and ECB easing bets. It
was on track for its first monthly gain since June.  
    Brent crude added about 0.3 percent to $102.74 a
barrel, but was on track for its second monthly loss. Global
growth-sensitive metal copper, meanwhile, was set for
its biggest monthly loss since March.

 (Reporting by Marc Jones, editing by John Stonestreet and Toby

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