By Jamie McGeever
LONDON (Reuters) - European stocks trimmed gains on Monday while government bond yields and the euro rose after weak euro zone inflation data cemented expectations the European Central Bank will ease policy but also prompted investors to take profit on these bets.
Inflation across the 18-nation bloc fell to 0.5 percent in March, according to preliminary estimates. That is the lowest level in over four years and likely to support expectations the ECB could act to counter the deflationary threat as early as this week when it holds its next policy meeting.
But the low number was not a major shock. So after stocks briefly popped higher and the euro slipped in anticipation the ECB will soon act, traders shifted their focus to the looming end of the first quarter and reduced their positions.
"It is only a matter of time before the (ECB's) Governing Council will conclude that it needs to take further policy action to prevent a worsening of the medium-term inflation outlook," wrote Capital Economics in a note to clients.
"Action later this week cannot be ruled out," it said.
As the second quarter looms, investors are drawing comfort from expectations of further stimulus from the ECB and Chinese authorities, which they hope will mitigate the gradual withdrawal of stimulus from the U.S. Federal Reserve.
At 1015 GMT the FTSE EuroFirst 300 index of leading shares was up 0.1 percent at 1,333 points (.FTEU3). Britain's FTSE 100 (.FTSE) was up 0.2 percent at 6,627 points, Germany's DAX (.GDAXI) was down 0.1 percent at 9,574 points and France's CAC 40 (.FCHI) was down a similar amount at 4,405 points.
U.S. stock futures pointed to gains of between a third and half of one percent across the three major U.S. indices.
Earlier in Asia, the MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> rose 0.9 percent to close at a three-week high of 137.84 points, on heightened speculation Beijing will launch new spending measures and on reduced geopolitical and military tensions in Ukraine.
Tokyo's Nikkei stock average (.N225) also rose 0.9 percent to a three-week high of 14,827 points, supported by comments from China's Premier Li Keqiang on Friday that Beijing was ready to support the cooling economy, saying the government had the necessary policies in place and would push ahead with infrastructure investment.
SPANISH BOND BONANZA
It has been a lackluster quarter for equity investors, however, with Wall Street and the main European indices only managing to eke out slender gains of around 1 percent.
The U.S. central bank has started trimming its bond-buying stimulus, and new Fed chair Janet Yellen said on March 19 that interest rates could start to rise six months after the bond buying is finished completely. That could be early next year.
Yellen will speak in Chicago later on Monday and the focus is on whether she maintains her stance on rates, which the market has interpreted as hawkish.
The 10-year yield on U.S. Treasuries rose on Monday to 2.75 percent. This lent broad support to the dollar, which was flat on the day against a basket of six major currencies at 80.2 (.DXY).
The euro rose a quarter of one percent to $1.3784, drifting up from Friday's one-month low. On Saturday, Bundesbank president Jens Weidmann said the euro zone was not in a deflationary cycle and the ECB should not over-react to low inflation data.
"The weaker CPI reading means that the ECB doves now have an argument in favor of moving sooner rather than later. Even if the ECB does not act this week, the euro should be under pressure from stronger U.S. data," BNP Paribas strategists said.
German benchmark 10-year yields rose to 1.59 percent, while in peripheral euro zone bond markets Spanish 10-year yields were steady on the day at 3.24 percent, near Friday's eight-year low of 3.2 percent.
Even after six consecutive quarters of decline, the fall in Spanish yields accelerated in the first quarter. The plunge of around 90 basis points in the first three months of the year is the biggest quarterly fall since the end of 1996.
In emerging markets, Turkey's lira hit a two-month high against the dollar after Prime Minister Tayyip Erdogan declared victory in local polls that had become a referendum on his rule, stirring hopes months of political turbulence would ease. The lira brushed 2.165, its strongest against the greenback since late January.
In commodities gold ticked higher to $1,295.80 an ounce, picking up from Friday's six-week low of $1,285.34, and U.S. crude oil futures edged down 20 cents to $101.47 a barrel after settling on Friday at its highest level since March 7.
(Reporting by Jamie McGeever; Editing by Pravin Char)