World stocks rally pauses for breath ahead of ECB meet

Investors reluctant to add to rally after data showed economic activity slowed last month

The rise in European stocks this week petered on Thursday after figures showed that economic activity slowed a bit last month and with investors reluctant to add fuel to the rally ahead of the European Central Bank's policy decision later in the day.

It was a similar story in debt markets, where the recent rise in US Treasury yields and fall in peripheral euro zone yields lost much of this week's momentum.

Investors' appetite for risk had been underpinned in recent days by signs of a post-winter improvement in the US economy, expectations Beijing will take steps to boost the Chinese economy and a reduction in emerging market volatility.

On Wednesday the S&P 500 hit a record high and Asian stocks a four-month peak, while benchmark US 10-year Treasury yields hit a one-month high and Greek 10-year yields posted their biggest one-day fall in two months.

The main focus on Thursday is the ECB's policy meeting. Seventy of 72 economists polled by Reuters expect the ECB to keep interest rates on hold at a record low 0.25%.

But with inflation across the 18-nation bloc falling to a four-year low of just 0.5% last month, the door is open to further easing, if not today then in the coming months.

"I think actually we need either a rate cut or a specific liquidity measure today - I think if we just get talk, there will be a slight negative response," said Ian Williams, equity strategist at Peel Hunt.

At 0800 GMT the FTSE Eurofirst 300 index of leading European shares was flat at 1,343 points and Britain's FTSE 100 index was up 0.1% at 6,667 points.

Germany's DAX and France's CAC 40 were both down 0.1% at 9617 points and 4427 points, respectively.

The German service sector grew at its slowest pace in five months in March and Italian services activity shrank, purchasing managers index data showed on Thursday. Euro zone activity slowed in March but was solid over the quarter.

GREEK COMEBACK

Overnight, MSCI's broadest index of Asia-Pacific shares outside Japan added 0.1%, brushing a new four-month high, and Japan's Nikkei jumped 1.2% to a three-week peak after China cut taxes for small firms and updated infrastructure spending plans.

In bond markets 10-year German government bond yields inched up a basis point to 1.63% and Greek yields slipped to a fresh four-year low of 6.16%.

Greece plans to return to the bond market in June after a four-year hiatus during which it was bailed out twice and defaulted in 2012.

France and Spain will test investor appetite for euro zone bonds later on Thursday when they auction up to 13 billion euros of debt.

Beyond the ECB meeting investors will be looking to US employment data for March on Friday. Private-sector jobs and factory orders data on Wednesday strengthened expectations of another solid report.

In currencies, the yen remained on the back foot as its safe-haven appeal continued to fade. The dollar traded at 103.95 yen, after briefly touching a 10-week high of 104.075.

"The yen's gains recorded earlier in the year, driven by external concerns over slowing economic growth in the US and China and heightened geopolitical risk related to developments in the Ukraine, are in the process of being reversed," Bank of Tokyo Mitsubishi analysts wrote in a note on Thursday.

The euro was little changed at $1.3765 against the dollar and sterling was up 0.1% at $1.6640 after Bank of England governor Mark Carney said interest rates could rise before May next year.

In commodities markets, gold slipped to $1,287 an ounce, three-month copper on the London Metal Exchange was down a third of one percent at $6,649.00 a tonne, and Brent oil was down a quarter of a% $104.51 a barrel.