GLOBAL MARKETS-Banks kick stocks up; uncertainty haunts dollar

Reuters: [2008-04-16 10:36:00]

By Veronica Brown

LONDON, April 16 (Reuters) - European stocks picked up the firmer tone set in Asia on Wednesday, with financials and tech shares helping cap risk aversion, but uncertainty stalked the dollar as nervous investors eyed results from major U.S. banks.

Inflation pressures simmered, with oil hovering close to record highs hit the previous day above $114 a barrel, while gold rose with U.S. and euro zone consumer price data on the horizon.

European stocks were lifted by a flurry of forecast-beating results from U.S. regional banks and a reassuring outlook from top chipmaker Intel Corp <INTC.O> that helped reduce worries on corporate earnings.

The FTSEurofirst 300 index of leading European shares rose 0.7 percent <.FTEU3> to 1291.81, echoing a strong showing from Tokyo's Nikkei average <.N225>. It rose 1.2 percent.

Despite a tentative improvement in risk appetite and tighter credit spreads fuelled by equity gains, overall sentiment appears split with optimists clinging to stronger than expected U.S. producer price inflation and the robust U.S. regional banks' results.

The spectre of U.S. recession and the global crisis in credit markets is continuing to fray nerves elsewhere as the dollar fails to keep gains made after U.S. producer prices jumped 1.1 percent in March, more than expected.

Analysts said currency markets were doing more to reflect caution in the run-up to quarterly results from top Wall Street names such as JPMorgan Chase <JPM.N>, Merrill Lynch <MER.N> and Citigroup <C.N>, after a report of more write-downs at Merrill Lynch. [ID:nT233755]

"There's still quite a bit of tension in the market. Some people think that the worst of the banking problems is behind us, but poor earnings and more write downs could have a hand in setting the market's direction," said Steve Barrow, chief currency strategist at Bear Stearns in London.

Worries that the world's biggest economy may have already stumbled into recession have kept the U.S. currency under pressure for months -- fanning a global rally in commodities, most of which are priced in U.S. dollars.

U.S. oil <CLc1> stood at $113.77 per barrel, having hit a record $114.08 on Tuesday.

INFLATION, HOUSING DATA EYED

Inflation figures are due on both sides of the Atlantic later. Analysts expect euro zone inflation for March to be confirmed at an annual 3.5 percent.

Surging costs of food and energy worldwide have accelerated global inflation and the European Central Bank has been vocal in highlighting inflation control as the bank's main priority, despite signs of slowing growth in the wake of the credit crunch.

Inflation expectations and accompanying hawkish European Central Bank rhetoric have kept the euro well supported near record highs. The single European currency was last quoted at $1.5842 <EUR=>, up a third of a percent on the day.

The dollar's broader tone was weak as it fell almost 0.4 percent against a basket of major rivals to 71.762 <.DXY>.

Later on Wednesday, investors will turn their attention to the U.S. consumer price index for March as well as data on housing starts and industrial output. [ECI/US]

RBC Capital Markets said in a note to clients that Tuesday's robust PPI data were a reminder of inflation being "very much alive and well" in the United States.

"An upside inflation surprise will give more credence to the arguments of the two Fed members...who voted for a less aggressive easing in March," the bank said.

U.S. interest rate futures show that investors see a roughly 80 percent chance of the Fed lowering rates by 25 basis points at its April 29-30 policy meeting, compared with a 20 percent chance of a 50 basis point cut.

(Additional reporting by Naomi Tajitsu)

(Editing by Gerrard Raven)

((RM:veronica.brown.reuters.com@reuters.net; Tel: +44 207 542 6745))

Keywords: MARKETS GLOBAL