Europe shares lifted by PMI data, China wobble hits Asia

Robust German PMIs helped Europe shrug off some mixed Asian data on Monday, though caution remained much in evidence just days away from what looks set to be a very close call on the fate of U.S. monetary stimulus.

European stocks started the week in better form than they ended on Friday, as an upturn among Germany's export-oriented manufacturers offset an unexpected slowdown in France to help the euro zone end the year on a high.

"It's really encouraging to see the increase in the overall rate of growth," said Chris Williamson, chief economist at Markit, which compiles the widely-watched purchasing managers index (PMI) surveys. "It's a reassuring signal that the recovery is still on track. We are not losing momentum."

Britain's FTSE 100, Germany's DAX and France's CAC 40 all overcame early wobbles to settle 0.3, 0.4 and 0.5 per cent higher respectively as they bounced away from two-month lows.

Jan von Gerich, chief developed markets strategist at Nordea, said the PMI data painted an interesting picture but stressed they were likely to be little more than a diversion for investors with so much going on this week.

The Federal Reserve meets on Tuesday and Wednesday to discuss tapering its $85 billion of monthly bond buying and opinion remains divided on whether it will move this week or wait until January - or even March.

"Tomorrow we get inflation data from the U.S. which will probably shape the final expectations going into the meeting because that has been one of the things that has been holding the Fed back," said von Gerich.

"Some of the recent data has suggested the weakest inflation is behind us, but it has not all been that way ... so (considering tapering expectations) a downside surprise will have a bigger impact than a upside surprise."

CAUTIOUS MOOD

The euro headed back in the direction of Friday's two-month high after the euro zone data, while the bloc's benchmark government bonds saw their yields rise.

The euro fetched $1.3771 versus Friday's $1.3811, though BNP Paribas analysts said the failure to hold above $1.3800 suggested there was scope for a retreat back to $1.3695.

The otherwise cautious mood in markets was encapsulated by MSCI's broadest index of Asia-Pacific shares outside Japan which was trading 0.4 per cent lower.

One of the standout moves was in Shanghai where stocks fell 1.6 per cent after a measure of growth in China's vast factory sector slowed to a three-month low in December as reduced output offset a pickup in new orders.

Japan's Nikkei also lost 1.6 per cent despite a generally upbeat survey of the country's business sector.

Confidence among big manufacturers improved to its highest level in six years, the survey from the Bank of Japan showed, boding well for Prime Minister Shinzo Abe's stimulus policies aimed at ending 15 years of grinding deflation.

"Conditions had definitely improved, especially if you look at small firms," said Masamichi Adachi, a senior economist at JPMorgan in Tokyo.

OIL EDGES UP

Part of the pick-up comes courtesy of the yen, which hit a five-year low against both the dollar and euro last week.

On Monday, the Japanese currency regained just a little ground as dealers trimmed short positions into the Fed meeting. The dollar bought 102.99 yen, having briefly hit a peak just shy of 104.00 on Friday.

The euro stood at 141.87 yen, against a top of 142.82, while the dollar index was 0.24 per cent lower at 80.021.

In commodity markets, spot gold was a shade lower at $1,228 an ounce, after gaining 1.2 per cent on Friday.

Brent futures rose towards $110 a barrel on Monday as supply concerns revived after Libya failed to reach a deal with tribal leaders to end the blockade of several oil-exporting ports.

Brent crude for January was $1 higher at $109.84, after falling as far as $108.02 in the previous session, the lowest since November 21. U.S. crude oil for January delivery edged up 25 cents to $96.84 per barrel.


Copyright Thomson Reuters 2013