By Mike Dolan
LONDON, May 28 (Reuters) - European government borrowing
rates surged to their highest in almost five months on Wednesday
after data showed German inflation accelerating as European
Central Bank officials warned of higher interest rates.
European stocks <> opened slightly firmer, taking a
lead from overnight Wall St gains and bucking Tokyo losses of
over one percent.
Yet even as U.S. crude oil prices <CLc1> added to Tuesday's
sharp retreat and fell further below $130 per barrel, German
bond yields surged after the German states of Saxony, Hesse and
Brandenburg all said annual inflation rates jumped more than
half a percentage point to more than 3 percent this month.
With other German states reporting later on Wednesday, the
news was compounded by national data showing import price rises
exceeding forecasts and climbed 0.9 percent last month.
The alarming inflation news came after Bundesbank President
and ECB policymaker Axel Weber told Reuters on Tuesday that the
central bank must keep the option of higher interest rates open.
Ten-year German bund yields, which set the benchmark for
euro zone government borrowing, rose to 4.347 percent
<EU10YT=RR> and set their highest since January 2.
"People are talking about rate hike expectations in the euro
zone, even though it's only a short while since we were talking
about lower rates," said Niels Christensen, strategist at
Nordea, Copenhagen. "They (ECB officials) will keep the hawkish
stance for the foreseeable future."
Weakness in German government debt markets was compounded by
the auction at 0900 GMT on Wednesday of a new 10-year bund.
But Euribor interest rate futures fell across the maturity
spectrum, pushing implied expectations for euro zone interest
rates higher over the coming year.
Government bond markets continued to show signs of weakness
as investors unload positions built up during the height of the
credit crisis and price in rising inflation. Benchmark yields on
the 10-year U.S. Treasury note <US10YT=RR> jumped about 7 basis
points on Wednesday after a reading of U.S. consumer inflation.
The euro <EUR=> benefited from the regional German inflation
news. By 0930 GMT, it was up at $1.5725 <EUR=>, moving towards
Tuesday's one-month high of $1.5818 according to Reuters data.
STOCKS ENCOURAGED BY OIL
But with stocks, particularly U.S. consumer technology
stocks <>, taking solace from the latest retreat in oil
prices, equity market sentiment was more upbeat.
"For the wider European market, falling oil eases
inflationary pressures, though we still have to knock a long way
back from here," said Justin Urquhart Stewart, investment
director at Seven Investment Management.
European shares added almost half a percent on Wednesday,
led by banks and defensive drug stocks as Royal Bank of Scotland
<RBS.L> gained on reports of interest for its insurance unit
even as commodity stocks slipped.
At 0920 GMT, the FTSEurofirst 300 index <> of top
European shares was up 0.4 percent at 1,319.54 points.
RBS gained 2.2 percent on reports of several bidders for its
insurance unit ahead of a first informal bid deadline. Credit
Suisse raised the stock to "neutral" from "underperform".
Drug stocks, viewed as defensives in times of stress, rose.
GlaxoSmithKline <GSK.L> gained 0.6 percent.
Commodity stocks, which have enjoyed a stellar run of late
due to booming metal and crude prices, were lower. Antofagasta
<ANTO.L> and BHP Billiton <BLT.L> both lost 0.8 percent.
ASIA CLOUDS
Asian stocks slid earlier, down for the sixth day out of
seven, as a cloudy U.S. economic outlook and lingering inflation
fears left investors skittish.
"While oil prices have eased somewhat, they still remain
high, and volatility in the foreign currency market is
contributing to investors' uncertainty about the macroeconomic
environment," said Lee Kyoung-su, a stock market analyst at
Daewoo Securities.
Japan's Nikkei share average <> fell 1.3 percent and is
down 10.4 percent this year.
An MSCI index of stocks in the Asia Pacific region outside
of Japan <.MIAPJ0000PUS> fell 0.7 percent, dragged down by the
Australian stock market <>, which sank 1.3 percent on
losses at resource-related companies.
China's third-largest oil and gas producer CNOOC Ltd
<0883.HK> fell 4.8 percent, helping to drag Hong Kong's Hang
Seng index <> down by 0.13 percent.
(Additional reporting by Toni Vorobyova and Kevin Plumberg in
Hong Kong, editing by David Christian-Edwards)
