European stocks up on hopes of China policy easing

Greek stocks and bonds fall again; oil anchored at 5-year lows

Oil prices were anchored at a five-year low on Wednesday and European stocks recovered from the previous day's selloff after a similar rebound in Chinese shares prompted by hopes that weak inflation will bring more monetary policy easing in China.

Greek stocks and bonds fell again, with short-term yields rising above long-term yields as next week's presidential election heightened investors' concerns over the country's near-term political, financial and economic future.

The biggest mover on global currency markets was the yen, racking up its third consecutive daily rise against the dollar as traders scaled back bets which culminated last week in the Japanese currency hitting a seven-year low.

"Asian markets started with equity weakness but soft Chinese inflation data prompted increased hopes of further People's Bank of China easing and that in turn calmed equities," said Kit Juckes, strategist at Societe General.

"(We are) watching equities, oil and Greece."

At 0845 GMT Britain's FTSE 100 was up 0.5% at 6563 points, Germany's DAX gained 1% to 9892 points and France's CAC 40 rose 0.8% to 4297 points.

The broader FTSEuroFirst 300 index of leading European shares was 0.7% higher at 1372 points.

On Wall Street overnight major indexes finished lower, though the S&P 500 recovered late in the day to close nearly flat.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.3%, but was off lows as Chinese shares closed up 2.9%. On Tuesday, the Shanghai index rose to a 3-1/2-year high before collapsing to lose more than 5%.

Data on Wednesday showed China's annual consumer inflation fell to a five-year low of 1.4% in November, signaling persistent weakness in the world's second largest economy.

Japan's Nikkei stock average tumbled 2.3% as a stronger yen prompted investors to sell exporters' shares.

The dollar was down a third of one% at 119.27 yen, more than two yen off Friday's peak of 121.83 yen, and the euro was steady at $1.2372.

RISK AVERSION

The focus for bond investors in Europe was firmly on Greece, where short-term yields shot above long-term yields. This yield curve inversion often indicates a country is about to default or fall into recession.

Three-year Greek bond yields shot up 34 basis points to 8.532%, the highest level since the bonds were issued back in July, and above 10-year yields which rose 11 basis points to 8.17%.

"Risk aversion has once again taken hold of European markets. We remain cautious on (euro zone) periphery markets over the near-term given the heightened degree of political uncertainty," Citi strategists said in a note on Wednesday.

Greek stocks were down more than 2% in early trading following Tuesday's 12.7% loss, which was the biggest one-day fall since 1987.

Front month Brent crude oil futures were down 1.5% at $65.85 a barrel, barely 50 cents above Tuesday's five-year low of $65.29.

Adding to pressure on crude prices, the American Petroleum Institute, an industry group, reported a 4.4 million barrel build in crude stockpiles last week when analysts had predicted a drop. 

Low oil prices, weak global inflation and the political developments in Greece supported demand for safe-haven US Treasuries. The yield on benchmark 10-year notes stood at 2.218% in Asian trade, down from its US close of 2.220% on Tuesday.

Spot gold rose to a seven-week high earlier in the day of $1,238.20 an ounce.