Investors seek balance between central banks, Syria and rebounding economy

A man walks through the lobby of the London Stock Exchange

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A man walks through the lobby of the London Stock Exchange August 5, 2011. REUTERS/Suzanne Plunkett

By Richard Hubbard

LONDON (Reuters) - European government bond yields were at near 1-1/2 year highs on Thursday and the dollar clung close to six week peaks on a combination of a better global economic outlook, nervousness about Syria and pending central bank meetings.

Russia and China, meanwhile, both warned the U.S. ahead of the G23 meeting in St Petersburg that the end of the Federal Reserve's bond-buying program could have a profound impact on the global economy.

The European Central Bank and Bank of England were both expected to leave interest rates unchanged, but investors were looking for statements reiterating pledges to keep rates low given recent stronger economic data.

ECB President Mario Draghi "is going to want talk down the prospects of recovery a little bit and get people's feet on the ground," said Will Hobbs, head of equities strategy at Barclays Wealth.

European money market rates have been moving higher recently in response to stronger economic data and on expectations the Federal Reserve is set to begin unwinding its stimulus, possibly as soon as later this month.

Analysts see little options for the bank other than just maintaining a soft tone in communication, sending German 10-year bond yields have risen to 1-1/2 year highs of 1.981 percent.

Earlier the Bank of Japan voted unanimously to maintain its monetary stimulus, while declaring the world's third-largest economy was on a recovery path, sending the yen briefly above 100 to the dollar, a six week low.

In the emerging markets India's new central bank chief began his tenure in spectacular fashion by unveiling measures to support the currency and the banking sector that sent the main NSE (.NSEI) share index up 3.3 percent and boosting the rupee.

The rupee rose to as high as 65.53 per U.S. dollar, pulling well away from a record low around 68.85 set last week.

The gain in Indian stocks and a slight rise in Tokyo's shares after the BOJ decision helped lifted Asia equity prices by 0.6 percent, to near a three week high.

European share markets (.FTEU3) were up 0.5 percent in early trade, gaining ground for the second day in a row and hitting its highest level since August 27.

"People are waiting for cues from the central banks, and there is just no real trend on the market at the moment," said Guillaume Dumans, co-head of research firm 2Bremans.

The euro last traded at $1.3185, down slightly against the stronger dollar and not far from a six-week low of $1.3138.

MSCI world equity index was up 0.1 percent following a second day of gains on Wall Street spurred by another set of upbeat U.S. data, which included the strongest monthly rise in car sales during August since October 2007.

"Strong car sales in the U.S. again lifted market confidence in the economy, and lifted expectations that the U.S. Federal Reserve will start cutting back its stimulus this month," said Isao Kubo, an equity strategist at Nissay Asset Management.


Markets remained cautious about Syria as a possible U.S. military strike moved one step closer after a Senate committee voted in favor of action, clearing the way for a vote in the full Senate, likely next week.

The possible military strike against Syria in reaction to its alleged use of chemical weapons and the Fed's decision to reduce its stimulus were expected to dominate discussions at a meeting of leaders from the Group of 20 developed and developing economies in St Petersburg.

In a note prepared for the meeting the IMF warned that emerging countries were particularly vulnerable to a tightening of U.S. monetary policy.

It urged strengthened global action to revitalize growth and better manage risks, adding some downside risks have become more prominent.

U.S. President Barack Obama meanwhile was expected to use the meeting to win international backing for a military strike against Syria and this was keeping a floor under oil markets

Brent crude rose 56 cents to $115.47, while U.S. oil was up 64 cents to $107.97.

(Additional reporting by Blaise Robinson. Editing by Jeremy Gaunt)

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