Global Markets: Euro goes up as ECB prepares to wind down

By Marc Jones

LONDON (Reuters) - The euro rose to its highest in a month but world stocks wilted on Thursday, as the European Central Bank prepared to pull the plug on its 2.55 trillion-euro, three-year stimulus programme.

After the Federal Reserve raised U.S. interest rates for the second time this year and hinted at two more, it was shaping up to be a double-whammy for risk assets that have risen sharply in value during years of ultra-cheap borrowing.

All sectors on the pan-European STOXX 600 index were in negative territory. Basic resources stocks led the decline with a 1.5 drop after weak economic data too from big metals consumer China. [.EU]

The dollar had popped higher after the Fed's move, but faded in Asia and was still falling as the euro pushed above $1.1820 before the ECB decision.

Euro zone government bond yields also edged up with Germany's Bunds offering 0.49 percent versus the 2.96 percent from U.S. Treasuries which had briefly topped 3 percent overnight.

"I think its pragmatic for the Fed to take these moves, because if you are not going to make them now, when are you going to take them," Kully Samra, European managing director at $3 trillion U.S. asset manager Charles Schwab, said.

The ECB had probably been too slow to reduce stimulus, Samra added, though recent weaker data showed Europe still had underlying issues.

Also keeping investors in check were concern about U.S. threats to impose tariffs on $50 billion of Chinese goods. U.S. President Donald Trump will meet with his trade advisers later to decide whether to activate the tariffs, a senior administration official said on Wednesday.

In Asia, surprisingly soft Chinese retail sales and investment data had hit sentiment too. China's central bank then left its interest rates on hold, rather than follow the Fed as it sometimes does..

MSCI's broadest index of Asia-Pacific shares outside Japan lost 1 percent.

Shares in South Korea and Taiwan fell over 1.8 and 1.4 percent [.T], Japan's Nikkei dropped 1 percent while mainland China's Shanghai composite index hit a 20-month closing low. [.SS]

TRADE TENSIONS

Any changes to the ECB's asset-purchase programme should appear in a post-meeting statement due at 1145 GMT. The bank's chief Mario Draghi then holds a news conference at 1230 GMT.

The biggest complication might be the increasingly murky economic European outlook. The continent faces a developing trade war with the United States, a populist challenge from Italy's new government and softening export demand.

"It would be wise (for the ECB) to lay out policy for the remainder of the year so any unexpected events over the summer, for instance from Italy, don't interfere with its plans," KBC interest rate strategist Mathias van der Jeugt said.

Another event markets were gearing up for was the start of soccer's World Cup in Russia. Russia's timezones mean there will be more matches during European or U.S. and Latin American trading hours than any previous tournament.

A study done during the last one with similarly timed games -- the 2010 finals in South Africa -- showed trading volumes on share markets dropped by a third on average when matches were on and 55 percent when a market's own team played .

U.S. retail sales figures were also due too. S&P 500 and Dow Jones and Nasdaq futures all pointed to subdued restart later.

The dollar stood at 110.06 yen after falling from a three-week high of 110.85 following the Fed's decision. The dollar index, which tracks it again six top currencies, was down 0.4 percent having erased all of its week's gains.

The Australian dollar fell 0.35 percent to $0.7551 after China's poor economic data, but the yuan showed little reaction, especially after the PBOC opted not to raise its rates.

"There is no urgency for China to maintain its favourable yield differential against the United States as capital outflow and currency stability is no longer the key concern for China at the moment," said Tommy Xie, an economist at OCBC Bank. "With U.S.-China trade war looming, a slightly weaker yuan may be in China's favour."

Some emerging market currencies have been hit hard by worries higher U.S. interest rates could prompt investors to shift funds to the United States. The dip in the dollar on Thursday brought welcome relief.

South Africa's rand rebounded from a six-month low, the Turkish lira pulled out of a dive and the Mexican peso recovered from a 16-month low.

Among commodities, China-sensitive industrial metals sagged but gold and other precious metals made ground.

oil prices were little changed, underpinned by a bigger-than-expected decline in U.S. crude inventories and surprise drawdowns in gasoline and distillates, which indicated strong demand in the world's top oil consumer.

Brent and U.S. crude futures traded at $76.83 and $66.67 a barrel respectively, to extend their recovery from eight-week lows touched last week.

(Additional reporting by Tommy Wilkes, editing by Larry King)