Shares near 6-yr high, euro firm after inflation rebound

Reuters Posted online: Friday, Nov 29, 2013 at 0000 hrs
London : World stocks hovered around a six-year high on Friday as faith in an improving global economy and support from central banks drove markets towards a third straight month of gains.

The Nikkei in Tokyo notched up its best November since 2005 despite some late profit taking in Asia, as the yen, at a five-year low against the euro and a six-month low versus the dollar, boosted hopes for its big exporting firms.

European shares were near a 5-1/2 year high and heading for a seventh week in positive territory out of the last eight in a relaxed end to the month.

London's FTSE, Paris's CAC 40 and Frankfurt's Dax all inched up, while Madrid's IBEX outperformed with a rise of 0.5 percent after ratings agency Standard and Poor's upped its outlook on Spain.

The rating firm also nudged up troubled Cyprus's junk status rating but at the same time stripped the Netherlands of its prized AAA grade, blaming its worsening growth prospects. The bond market reaction, however, was muted. Spanish bonds marginally outperformed but even Dutch debt made ground despite the bad news.

After some higher-than-expected German and Spanish inflation numbers the previous day, there was little surprise when the wider euro zone reading came in slightly above forecast at a still-depressed mark of 0.9 percent.

Markets were caught out last month after a plunge to just 0.7 percent prompted the ECB to cut the bloc's interest rates but the signs of a rebound suggested there may be less drive for more action from Frankfurt in the coming months.

"The ECB will inevitably have to do quantitative easing, but two things need to happen first," said Neil Williams, chief economist at fund manager Hermes in London. "Constitutional change, that is easy, but also that Germany needs to smell deflation. And I fear this number will prove a bit of an unfortunate distraction."

YEN LOWS

With many in the U.S. extending Thanksgiving breaks into the weekend, trading was expected to be light on Wall Street where futures pointed to early gains of 0.2 percent for the S&P 500 and Dow Jones Industrial.

In the currency market, the euro shuffled up to $1.3612 after the inflation data, and pushed back up against the yen having dropped from a new five-year high of 139.705 yen overnight. Investors have been using the yen as a funding currency for carry trades with the Bank of Japan committed to keeping ultra-loose monetary policy to shore up growth - in contrast to the U.S. Federal Reserve which is moving towards unwinding its $85 billion-a-month bond-buying campaign.

The yen is down almost 18 percent versus the euro this year, while it is off 15 percent against the greenback - and is also set for its biggest one-month fall since January. The Nikkei meanwhile, has rallied 50 percent this year.

Data on Friday showed Japanese consumer inflation accelerated to a five-year high and factory output rose for a second straight month in October, more evidence the recovery in the world's third-largest economy should extend into 2014. "Industrial production was good but it was below consensus. Gradually, the market is coming to believe the BOJ will be forced to react again sometime next year," said Kyoya Okazawa, head of global equities and commodity derivatives at BNP Paribas in Tokyo.

GOLD WEIGHS

Among commodities, oil held near $111 on course for its biggest monthly rise since August, while growth-attuned metal copper limped to a 3 percent monthly fall.

Gold was also licking its wounds at $1,247 an ounce after its biggest monthly drop since June took its year-to-date slump to more than a quarter of its January value.

It is a fall that is being driven by worries over the U.S. central bank, the Federal Reserve, eventually scaling back its huge, $85 billion a month stimulus programme.

Emerging market currencies and stocks have also been in the firing line and Indonesia's central bank mirrored a move by Thailand earlier in the week as it intervened on Friday to lift the rupiah away from a near five-year low.

Due to Indonesia's sizable current account deficit, the rupiah is regarded as the Asian currency most vulnerable to capital outflows once the Fed finally starts cutting its aid.