January 30, 2013 / 8:36 AM / 5 years ago

GLOBAL MARKETS-Disappointing U.S. data hits shares, helps euro

* Euro hits 14-month high driven by confidence, ECB
repayments
    * World shares at 21-month high, U.S. GDP miss adds downward
pressure
    * Fed's statement awaited for clues on asset-buying
programme

    By Marc Jones
    LONDON, Jan 30 (Reuters) - A surprise contraction in the
U.S. economy in the fourth quarter hit shares on Wednesday and
also helped keep the euro close to a 14-month high.
    The data showed the world's largest economy unexpectedly
suffered its first decline in the fourth quarter since the
2007-09 recession, and this dampened the mood in financial
markets ahead of a meeting of the U.S. Federal Reserve.
    There had been optimism earlier in the day after several
encouraging reports on the European economy that saw the euro
 break above $1.35 for the first time since December
2011.     
   "It's (GDP) an awful number. This dashes hopes among
investors that the Federal Reserve will move away from an
ultra-easy monetary policy," said Joe Manimbo, senior market
analyst, Western Union Business Solutions.
    "This is a source of weakness for the dollar because it
takes away the narrative that the U.S. economy is performing
better than the rest of the world."
    The Fed is expected to maintain asset buying at $85 billion
a month when it concludes its meeting later and stick to its
commitment to hold interest rates near zero until unemployment
falls to at least 6.5 percent. 
    The GDP data overshadowed a third straight rise in European
economic confidence, ECB crisis loan repayments and a solid sale
of five and 10-year Italian bonds which provided fresh evidence
of the recent improvement in the region.    
    The disappointment left European shares down 0.3
percent by 1345 GMT and Wall Street was expected to open lower,
although an earlier rise in Asian shares kept the MSCI world
share index at a new 21-month high.
    Alongside the rebound in confidence in the euro zone, one of
the key drivers behind the currency's recent spike has been the
eagerness of banks to repay the crisis loans they took from the
European Central Bank just over a year ago.
    Banks returned a larger-than-expected 137.2 billion euros of
those loans on Wednesday and also surprised analysts by trimming
their three-month funding despite predictions they would use it
to partly restock their coffers.  
    "It (the euro rise) is just a carry on with the current
trend, risk is pretty healthy and equities are doing well," said
Bank of Tokyo Mitsubishi strategist Derek Halpenny.
    "The danger is European policymakers allow a spike (in euro
and market rates) as a result of a removal of one of the
principle support measures ... With the Fed and the BOJ still
easing the euro is clearly the path of least resistance."
 
    CONFIDENCE RALLY
    Focus of the Fed decision will be on its outlook for the
economy and its bond buying programme after it sounded slightly
more hawkish last month. 
    Earnings season also remains in full stride. Thomson Reuters
data shows that of the 174 companies in the S&P 500 that have
reported so far, 68.4 percent have been above analyst
expectations, which is above the long term average.
    Tuesday strong U.S. housing data on Tuesday and China's
promising economic growth forecast for 2013 raised expectations
for robust demand for fuel and industrial commodities,
underpinning oil prices and lifting copper.  
    Brent crude oil reached its highest level in three and a
half months as it passed $115 a barrel leaving it up 3.5 percent
so far this month.
    "Oil has followed risk assets higher, but we think it's
strong versus the fundamentals, with production cuts needed from
Saudi Arabia due to strong supply from OPEC," cautioned Filip
Petersson, an SEB analyst in Stockholm.    
 

    MIXED EUROPE    
    Euro zone economic sentiment improved more than expected
across all sectors in January, rising for a third straight month
in a sign the bloc's economy could be emerging from a low point
in the fourth quarter of 2012. 
    However, figures showed Spain's economy sank deeper into
recession at the end of 2012, shrinking at the fastest pace in a
year, as budget cutbacks and high unemployment prompted
households to slash spending.
    An ECB survey of Europe's banks also darkened the mood,
showing that most expect to continue toughening up their lending
rules in the coming months and see another drop in demand for
loans.  
    In the bond market, traditional safe-haven German bonds fell
after a solid Italian debt auction underscored the new appetite
from yield-hungry investors for peripheral euro zone debt
although the disappointing U.S. figures saw them pare losses and
    U.S. Treasuries also turned around an early slump.
    Just six months ago yields on Italian and Spanish debt
soared but the ECB's promise to keep the euro together has
prompted a turnaround. 
    Rome sold 3.5 billion euros ($4.7 billion) of 10-year bonds
at 4.17 percent on Wednesday, its lowest cost since October
2010.    
    "What we've been seeing recently is increased demand
particularly from overseas, for Italian bonds, not just the
short end but particularly the longer end... I think today's
auction provides further evidence that is indeed occurring,"
said Nick Stamenkovic, a bond strategist at Ria Capital Markets
in Edinburgh.

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