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GLOBAL MARKETS-Stocks recover as bond jitters retreat, euro hits 3-year high

From Reuters - January 12, 2018

LONDON (Reuters) - World stocks scaled fresh peaks on Friday while the euro hit a three-year high and Bund yields rose as progress on forming a German government gave fresh impetus to a bond market sell-off triggered by signs the ECB may accelerate an end to its stimulus.

MSCIs broadest gauge of the worlds stock markets hit yet another record high and was on track to rise for its eighth of the nine business days so far this year -- for a total increase of 3.5 percent.

This bull market is highly related to the fact we are facing good growth, low inflation and soft monetary policy normalization. If any of those were to be shaken that would be a big problem, said Jeanne Asseraf Bitton, head of cross-asset research at Lyxor Asset Management.

Germanys 10-year bond yield hit a fresh five-month high of 0.539 percent after Chancellor Angela Merkels conservatives and the Social Democrats agreed a blueprint for formal coalition negotiations, news that also buoyed the euro.

European stocks took their cue from a recovery in Asian trading, but were set to end the week on a dud note as a surging euro weighed on European exporters and kept gains on Germanys DAX muted despite the breakthrough in coalition talks.

MSCIs index of European stocks index eked out a 0.1 percent gain as the euro hit its highest in three years at $1.2128 and last traded up 0.8 percent at $1.2126.

The euros overnight index swap rates have risen sharply this week as traders priced in a higher chance of a rate hike early next year.

While the currencys rise has reflected growing optimism over the blocs economic recovery, investors have flagged it as a potential brake on stocks. Monica Defend, head of strategy at Amundi Asset Management, said the currency, for which she has a target of $1.22, was the biggest risk to European equities.

European bond yields were also driven higher by minutes on Thursday of the ECBs December meeting that showed it thinks it should revisit its communication stance in early 2018.

Lyxors Bitton said Bund yields were already near to hitting her target for the first quarter.

Markets were a bit too complacent about bonds so they took some excuses to correct, she said. We were a little surprised that the market reacted so strongly to the ECB.

The minutes showed that with the euro zone seeing its best growth in a decade, ECB policymakers were considering a gradual shift in its stance to reduce the focus on bond purchases and raise the emphasis on interest rates.

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