Signs of euro zone recovery support European shares

 

Clear signs the euro zone has crawled out of an 18-month long recession supported European shares near a 10-week peak on Wednesday and saw German 10-year yields hover near their highest level in almost two months.

 

The German economy grew by 0.7% in the second quarter, its largest expansion in over a year, while the French economy expanded by 0.5%, more than twice as fast as expected and exiting its own shallow recession.

 

The growth in Europe's two largest economies paves the way for a positive surprise when gross domestic product (GDP) data for the whole of 17-nation euro area is released at 0900 GMT.

 

"The euro zone has been hauled out of recession and Germany has done the lion's share of that," said Andreas Scheuerle, economist at Dekabank.

 

The FTSE Eurofirst 300 index of top European shares, which has steadily gained over three weeks as signs of a recovery have mounted, was flat at around 1,236 points in early trade, within sight of its 2013 peak of 1,258.09.

 

Prices for 10-year German government debt were also steady with the yield around 1.83%, its highest since late June when hints the US Federal Reserve was ready to cut back on its bond-buying programme rocked financial markets.

 

The euro was slightly firmer against the dollar at $1.3260 but off a high of $1.3316 hit on Tuesday, with the greenback buoyed by upbeat US retail sales data that has sent US Treasury yields sharply higher.

 

The dollar's index against a basket of currencies stood near one-week highs touched on Tuesday, while against Japan's currency it was little changed at 98.13 yen.

 

FED FEARS

 

Yields on benchmark US 10-year Treasuries held near 2.7% after rising to their highest in nearly two years on Tuesday as investors prepared for the Fed to start tapering its $85 billion a month of asset purchases.

 

Talk about the Fed's next step escalated on Tuesday when Atlanta Fed President Dennis Lockhart said it was too early to detail plans for a tapering, but did not rule out the possibility of it starting next month.

 

His suggestion it would neither be sudden or drastic boosted sentiment in US stock markets that carried into Asian trade.

 

MSCI's broadest index of Asia-Pacific shares outside Japan was flat, while Japan's benchmark Nikkei stock average  closed at a one-week high. Hong Kong markets were closed on Wednesday due to a typhoon.

 

In Britain, traders were focused on the release of June unemployment data after the Bank of England explicitly linked the chances of tighter policy to a drop in the jobless rate earlier this month.

 

"With Bank of England policymakers focused on the new unemployment target, the jobs report is the single most important driver for the pound and for UK markets in general," said Ned Rumpeltin, head of G10 FX strategy at Standard Chartered.

 

Minutes of the August 1 policy meeting are also due and will be watched for clues on how much support new governor Mark Carney found for the new forward guidance plans.

 

Evidence of improving global growth helped copper gain 0.2% to $7,285.50 but worries about the Fed curbing its commodity-friendly stimulus saw gold slip to $1,320.51 per ounce.

 

Brent crude edged down towards $109 a barrel.