By Jeremy Gaunt, European Investment Correspondent
LONDON, June 6 (Reuters) - Repercussions from the European
Central Bank saying it could raise interest rates swept across
markets on Friday, hammering short-tern euro zone debt, while
investors also faced the key monthly U.S. jobs report.
Global stocks rallied as investors fled bonds. The euro held
on to its heavy previous day's gains against the dollar, which
in turn gained against the Japanese yen.
ECB President Jean-Claude Trichet jolted markets by saying
higher benchmark interest rates were "possible" in July, kicking
the euro higher and driving up bond yields as investors sold
government debt.
Two-year euro zone government bond yields rose so far above
10-year yields on the sell-off that the resulting yield curve
inversion is at its widest since the launch of the euro.
An inverted curve is an anomaly as longer-term interest
rates are usually higher than short-term rates.
"The short end of the (euro debt) yield curve is getting
slaughtered," said Marc Ostwald, a bond analyst at Insinger de
Beaufort in London.
Two-year yields <EU10YT=RR> were up at 4.671 percent while
10-year yields dipped on the day to 4.462 percent.
Stronger-than-expected U.S. weekly jobs data on Thursday,
meanwhile, also weighed on government bonds, boosted stocks and
set the stage for the monthly payrolls report data later on
Friday.
"If the non-farm payrolls are not worse than expected, if
they come in like a lot of the American data -- better than
expected -- then we obviously are going to go higher," said Mike
Lenhoff, chief market strategist at Brewin Dolphin, referring to
equities.
A weak number, however, could hurt the dollar's recent,
tentative rise against many currencies and prompt worries about
expected returns from U.S. companies.
Stock markets were generally buoyant ahead of the data.
The pan-European FTSEurofirst 300 <> was up 0.5
percent while Japan's Nikkei <> closed up 1.7 percent.
MIXED DOLLAR
The euro hit a five-month high versus the yen and added to
hefty gains against the dollar following Trichet's hawkish
comments.
"The story in the last 24 hours has been about the euro
doing well, with the yield outlook making the euro look more
attractive," said Chris Turner, head of FX strategy at ING.
The Trichet comments doused this week's dollar rally, which
gathered pace after Federal Reserve Chairman Ben Bernanke
commented about the impact of dollar weakness on inflation.
The euro was up 0.1 percent at $1.5601 <EUR=> just off a
high of $1.5617, a sharp rebound from Thursday's pre-Trichet
three-week low of $1.5365.
The single currency climbed 0.3 percent to a five-month high
of 165.70 yen <EURJPY=R>, according to Reuters data, as solid
gains in regional stocks spurred carry trades where investors
sell the yen in favour of higher yielding assets.
(Editing by Malcolm Whittaker)
