July 17, 2012 / 7:22 AM / 7 years ago

GLOBAL MARKETS-Shares, euro edge higher ahead of Fed's Bernanke

* World shares gain on hopes of clues about next Fed stimulus

* Dollar falls to near four-week low vs yen, euro rises

* Spanish 10-year bond yields edge closer to 7 pct

By Richard Hubbard

LONDON, July 17 (Reuters) - Global shares and the euro edged up on Tuesday as investors speculated that Federal Reserve Chairman Ben Bernanke would hint at more monetary stimulus later in the day.

Weak U.S. retail sales data and a cut in the International Monetary Fund’s global growth forecast on Monday have bolstered the view that the world economy is slowing, encouraging markets to position for further action by central banks.

U.S. stocks were also poised to open higher, reversing some of the previous day’s losses ahead of the Fed chairman’s testimony, which is due to begin at 1400 GMT.

“Investors are calling out for some policy ‘shock’ to break out from the current market doldrums, knowing from bitter experience that if (the) policy response disappoints expectations, the force of gravity could take stock markets lower,” Bill O’Neill, chief investment officer for EMEA at Merrill Lynch Wealth Management.

World share markets were up 0.2 percent at 309.92 points on Tuesday, having steadily weakened so far in July due to a gloomy start to the second quarter earnings season and data showing the giant U.S. and Chinese economies slowing.

Brent crude oil joined in the gains to trade above $104 a barrel, marking a fourth straight day of rises.

However, the FTSEurofirst 300 index of top companies was mostly steady, having risen 0.1 percent in the previous session, with investors reluctant to push higher.

The FTSEurofirst index has rallied more than 9 percent in the last six weeks, helped by the European Central Bank’s interest rate cut, though it remains more than 5 percent off its March 2012 highs.

“Until we get a clearer outlook on key economies, (markets) are going to go nowhere fast,” said Richard Jeffrey, chief investment officer at Cazenove Capital Management.

The latest ZEW German economic sentiment index out on Tuesday confirmed that investors are increasingly concerned about the strength of Europe’s largest economy as the weakness across the euro area hampers its performance.

“The economic outlook has become even murkier,” said Andreas Scheuerle, head of European economics at DekaBank.

“While the euro zone economy has visibly suffered under the debt crisis and the austerity measures, the indicators from the rest of the world also look weak.”


The Fed chairman begins the first leg of a two-day testimony to U.S. lawmakers later on Tuesday and is expected to be pressed on whether the central bank is close to launching a third round of large-scale asset purchases (QE3), and what kind of other tools it might consider using.

The Fed’s decision last month to buy an additional $267 billion in long-term bonds with proceeds from short-term debt, a measure known as Operation Twist, has already put the U.S. central bank on a policy easing footing.

But since then central banks in Europe, the UK, China and Brazil have announced looser monetary policies while a string of weak domestic U.S. economic data has raised hopes of new steps.

Data due out later on U.S. inflation and industrial output could add to pressure on the Fed to act.

The prospect of easier U.S. monetary policy has undermined the dollar, sending it to a one-week low against a basket of major currencies and near one-month lows against the yen.

The dollar index was down for a third straight day at 83.05 and traded around 79.01 yen.

In response, the single currency climbed to a one-week high of $1.2314 before settling up 0.2 percent against the dollar at $1.2295.

“The market is positioned aggressively for more QE, but I think Bernanke would want to wait for a bit more data, which leaves it at risk of a disappointment and a dollar bounce,” said John Hardy, FX strategist at Saxo Bank.


In the debt market, Spain auctioned 3.56 billion euros ($4.36 billion) of Treasury bills, meeting its target.

Borrowing costs were lower than a month ago but are still high because investors have been unimpressed by the latest wave of austerity measures aimed at reducing the budget deficit and avoiding a full-scale sovereign bailout.

Spain faces a tougher test on Thursday when it auctions up to 3 billion euros of medium and longer-dated bonds with its 10-year bond yields edging closer to the 7 percent level widely seen as unsustainable for a country’s finances.

Ten-year bond yields were up eight basis points to yield 6.88 percent on Tuesday.

“It’s looking like an uphill battle for Spain. They’ve been fortunate so far this year to be able to get their Treasury offerings away,” said Peter Dixon, economist at Commerzbank.

“I think there’s going to come a point fairly soon where we reach saturation point, and I think that will put upward pressure on interest rates.”

Spain may see some relief on Friday when euro area finance ministers are due to agree the final details of 100 billion euro bailout package for Spanish banks.

Commodities were trading in narrow ranges ahead of the Bernanke testimony, with gold prices rising towards $1,600 an ounce in line with the firmer euro.

The metal has traded within a $150 range for the last three months, largely tracking the euro/dollar exchange rate, a key price driver, as it awaits clearer direction on U.S. policy.

Oil also gained in line with other riskier assets, with some traders saying the slowdown in global growth was largely reflected in the current price following a fall of 25 percent from the peak set in March this year.

Brent crude futures were up $1.01 to $104.38 a barrel, and U.S. crude was up 24 cents at $88.65.

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