By Ruth Pitchford
LONDON, Jan 10 (Reuters) - Sterling gave up earlier gains
against the dollar and euro while European stocks weakened after
the European Central Bank followed the Bank of England in
keeping its benchmark interest rate on hold on Thursday.
The ECB's decision to keep rates at 4 percent was widely
expected, given that policymakers are torn between the need to
fend off inflation driven by rising food and fuel prices, and
recessionary risks from a global credit crisis.
But investors had seen the UK central bank's decision as a
closer call after recent signs of heavily indebted British
consumers curbing their spending.
Sterling fell ahead of the Bank of England decision, bounced
back on the "no change" announcement, then fell again as the
ECB's decision reminded the market it has shown fewer signs it
is willing to cut than the Bank of England, which reduced rates
to 5.5 percent in December.
By 1300 GMT expectations that sterling's interest rate
premium over the euro will be further eroded sent the pound
sliding back towards a 10-month low <GBP=> of $1.9542 struck
before the Bank's decision and a record low against the euro
<EURGBP=> of 75.14 pence seen earlier in the day.
The decision also undermined a relief rally in UK retail
stocks that had followed results from British's third-largest
supermarket chain. J Sainsbury <SBRY.L> met analysts'
expectations with its quarterly trading figures.
"Quite frankly, we want to see some better macro data and
also company results are starting to come out now," said Edmund
Shing, a strategist at BNP Paribas in Paris.
"We want to see some reassurance that the world is not going
to hell before we can bounce back more meaningfully."
U.S. stock futures dropped on Thursday as a profit warning
from Capital One Financial Corp <COF.N>, a credit card issuer
and banking company, fuelled concerns about the impact of the
credit crisis and falling U.S. house prices.
RETAIL WORRIES
Britain's blue chip FTSE 100 index <> turned negative
after the rate decisions and last stood down 0.2 percent at
6,259.8 points, while UK interest rates and gilt futures fell
sharply.
European government bond trading was cautious in the run up
to the European Central Bank's press conference at 1330 GMT,
while a big Spanish bond auction also weighed on the market.
The euro eased after the ECB announcement to trade at around
$1.4655.
The FTSEurofirst 300 index <> of top European shares
gave up some early gains to trade about 0.2 percent down at
1,446.46 points, after falling 1.2 percent on Wednesday.
MSCI's broad measure of world stock indices <.MIWD00000PUS>
was down nearly 0.4 percent at 387.75, while its emerging market
index <.MSCIEF> was down nearly 0.7 percent at 1,218.77 as
global market worries encouraged investors to sell riskier
assets.
Retailers are one of the worst performing corporate sectors
so far in 2008 as fear of a slowdown in consumer spending in
Britain and the United States has weighed heavily.
Expectations for a UK cut had been boosted by a raft of weak
retail reports, including a poor set of earnings from Britain's
biggest clothing retailer Marks and Spencer <MKS.L> on
Wednesday.
In the commodity markets, where inflationary pressures are
complicating central bank decision-making, oil fell below $95 a
barrel on Thursday as a rise in fuel stocks in top consumer the
United States offset a steep decline in crude supplies.
Gold <XAU=> softened in choppy trade but held near record
highs, with dealers expecting the market to undergo a period of
consolidation before hitting the $900 an ounce target.
