London stocks creep higher, rate fears linger

LONDON - European shares edged higher on Wednesday supported by corporate takeover talk, but investors are still cautious on the prospect of more interest rate rises in Europe and the United States.

By (Reuters)

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Published: Wed 7 Jun 2006, 8:45 PM

Last updated: Sat 4 Apr 2015, 3:22 PM

Expectations for higher US interest rates propped the dollar but weighed on commodities, with copper, gold and oil all trading lower.

Wall Street was set to open slightly higher, building on some positive momentum from late in the previous session, despite ongoing concerns about the economic outlook.

“I wouldn’t necessarily go so far as to say momentum is good, but it’s not as bad as it could have been because you had a much more positive close to the US markets in the last 30 minutes of trading on Tuesday,” said Tim Smalls, head of US stock trading at brokerage firm Execution LLC in Greenwich, Connecticut.

“I think you’ll continue to see volatility, and you’ll continue to see market swings based on Fed comments.”

Worries that Japanese exporters could be hit by a weakening US economy dented stocks in Japan, where the Nikkei 225 fell by 1.88 per cent to hit its lowest level since November.

Bank of Japan Governor Toshihiko Fukui said that Japanese share prices, as well as bond prices and currencies, are currently in an adjustment phase and that the drop was affected by falls in share prices in emerging markets.

The MSCI Emerging Markets Index is at its lowest level since early January having lost around 17 per cent since its peak in May.

Dollar firm

The dollar gained against the euro, although its progress was limited as the market anticipates a European Central Bank rate rise at its meeting on Thursday.

The dollar has strengthened against the single currency after St. Louis Fed President William Poole said a slowing economy on its own may not be enough to reduce inflationary pressures, echoing comments from Fed Chairman Ben Bernanke on Monday.

“The dollar is building up on comments like those from Poole ... confirming what Bernanke said a day earlier,” said Peter Fontaine, FX strategist at KBC Brussels. “There are a lot of dollar oversold conditions, so it’s technically-driven as well.”

The dollar was trading firmer at $1.2792 per euro, remaining close to Monday’s one-year low for the dollar.

Against the yen, the dollar was near a one-month high at 113.3 yen.

European stocks fight back

European shares rallied, supported by takeover talk around utility Suez, bank Lloyds and other stocks, but interest rate worries continued to bedevil overall sentiment.

This, added to doubts voiced by Federal Reserve officials on future rate decisions, left investors wary that central bankers’ drive to quell inflationary pressures may push monetary tightening too far and risk hurting economic growth on both sides of the Atlantic.

By 1255 GMT the FTSEurofirst 300 index of leading European shares was 0.5 per cent higher at 1,286 points.

The benchmark remains 9 per cent below a five-year peak of 1,407.52 hit a month ago.

“One doesn’t try to catch falling daggers,” said a senior dealer at a French broker, saying many investors were reluctant to come back to equities despite attractive valuations as they believed there was still further downside in the offing.

Gold and copper prices fell with copper hitting a one-month low below $7,500 a tonne, while oil edged lower as traders await U.S gasoline stocks data.

Euro zone government bonds steadied after recent declines, shrugging off data showing retail sales rising faster than expected in April.

Howard Archer of the Global Insight economics consultancy said there were now signs that consumers were “coming to life”.

“It may well be that recent genuine modest improvement in euro zone labour markets is beginning to feed through to support the consumer sector,” he said, referring to recent news of big drops in German and French official unemployment rates.

The yield on 10-year Bunds was little moved at around 4.00 per cent.

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