September 11, 2013 / 8:24 AM / 4 years ago

GLOBAL MARKETS-Share rally fades, markets watching diplomacy on Syria

* Week of stock market gains peters out as prospect of Syria
strike recedes
    * Sell-off in oil, core bonds eases
    * Wall Street expected to open -0.1 - +0.1
    * Sterling hits 7-month highs vs dollar, euro after jobs
data

    By Marc Jones
    LONDON, Sept 11 (Reuters) - A week of gains for world stocks
petered out on Wednesday and a sell-off in oil and core
government debt eased, as talks began on trying to avert a U.S.
military strike on Syria against a broadly calm market backdrop.
    The safe-haven yen was near a seven-week low against the
dollar and stood near multi-year lows against the euro and
sterling, while shares in Europe nudged higher ahead of what was
expected to be a flat start for Wall Street.   
    U.S. President Barack Obama said late on Tuesday that
Russia's offer to push Syrian President Bashar al-Assad to put
chemical weapons under international control could potentially
head off the type of limited military action he was considering.

    "Over the last few days, we've seen some encouraging signs,"
Obama said in televised speech from the White House.
    Markets were largely in consolidation mode after the big
moves of the two previous sessions when what looked to be a
rapid move towards U.S. action was halted by Russia's plan.
    Oil recovered some ground with Brent crude rising 
back above $112 a barrel from a 2-1/2-week trough of $110.59.
The steadier performance came after a 4-percent drop in the past
two sessions, its largest two-day fall since June.
    Copper edged slightly higher to $7,196 a tonne,
while gold inched back up to $1,365.90 having slid to a
three-week low of $1,356.85 an ounce.
    "The calmer market mood is largely because the geopolitical
risks have diminished," said Vasileios Gkionakis, global head of
FX Strategy for UniCredit in London. 
    "At the same time, the market is still digesting all the
data that we have had over the last 10-days or so and with the
exception of the downward revision of the U.S. payrolls, in
general, that has painted a positive picture."
    
    STERLING STRONG   
    There was little in the way of major economic news out of
Asia on Wednesday and offerings from the U.S. are thin, too.
 
    In Europe, Britain's unemployment rate bucked expectations
of a steady reading as it dipped to its lowest level since late
2012 in the latest sign its economy is picking up.
 
    Sterling rose to a seven-month high against both the dollar
 and the euro and to a mammoth 4-year high
against the weakened Japanese yen, as the surprise
bolsted suspicions the Bank of England may have to raise
interest rates earlier than it is currently suggesting. 
    The FTSEurofirst 300 pan-European share index
shrugged off early lethargy to stand 0.2 percent higher ahead of
the start of U.S. trading, as a 0.4 percent rise on Germany's
Dax balanced falls of 0.1 on London's FTSE and
Paris's CAC 40.
    The region's core debt markets also saw a largely quiet
session as this week's save-haven sell-off abated. 
    Benchmark German government bonds tracked
minor gains by U.S. Treasuries, while focus remained
on Italy after its benchmark yields shifted above Spain's for
the first time in 18 months on Tuesday. 
    Political instability and worries about Italy's banks ahead
of a major health check of all euro zone banks by the European
Central Bank in the coming months are driving the move. 
    Rome sold 11.5 billion euros of treasury bills at its
highest rate in over nine months, ahead of a tripartite bond
auction on Thursday which aims to raise 7.5 billion.
 
    Italy was well ahead of the game in terms of meeting its
2013 funding needs, but on Tuesday the Treasury asked parliament
to raise the ceiling on this year's net debt issuance to 98
billion euros from 80 billion, given the struggle to rein in
public finances.
    Analysts at Newedge said German elections on Sept. 22 would
be the "pivot point" for euro zone debt markets in the near-term
but that Italy had some specific issues that made it a danger.
    "While Merkel should win (German elections), her coalition
may not survive and force her into a coalition with center left.
This could weaken the euro but benefit the periphery," they said
in a note.
   "However, Italy may underperform as the ECB prepares for new
euro zone bank stress tests that compel especially the poorly
capitalized Italian banks to raise more equity capital."
        
    FED FOCUS
    Stock futures  pointed to a flat start on Wall
Street after the S&P 500 chalked up its sixth day of gains on
Tuesday. MSCI's 45-country strong world index 
was holding on to hopes of an eighth consecutive day of gains
which would be its longest run since June 2010. 
    Also helping risk currencies against the yen, which had seen
some safe-haven buying in recent weeks, was
stronger-than-expected industrial output that reinforced signs
that China's economy was stabilizing.
    The dollar backtracked to 100.27 yen having scaled a
seven-week peak of 100.55 yen, while the euro touched a 16-week
high around 133.37. 
    Against the dollar, the common currency reached a two-week
high of $1.3282 as it showed little interest in a warning
from one of the ECB's policymakers that Greece may need, not
one, but two more aid packages. 
    MSCI's broadest index of Asia-Pacific shares outside Japan
 ended 0.1 percent lower but remained at a
three-month high having gained more than 8 percent in the last
two weeks. Emerging market stocks dipped 0.2 percent.
    E-Trade Securities analyst Choi Kwang-hyeok said some
investors were choosing to book profits ahead of next week's
Federal Reserve meeting that could see the U.S. central bank
begin to scale back its massive stimulus campaign. 
    "The week ahead contains cues that could change foreign
capital flows," he said.

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