Shares bounce off lows after talk of Fed QE exit

By David Brett

LONDON (Reuters) - European shares lifted off lows on Friday while the dollar held near a 10-month high against a basket of currencies as investors considered the prospect the Federal Reserve might begin easing off on asset buying.

The German Bund future meanwhile rose sharply on what traders said was market talk the European Central Bank had checked some banks' preparedness for a potential cut in its deposit rate to below zero.

European shares <.fteu3> bounced off session lows of 1,239.55 and were flat at 1,245.78, holding near five-year highs and on course for their fourth straight week of gains.

The dollar index rose 0.3 percent to 83.812 <.dxy>, close to this week's 10-month high of 84.094.

Early stock losses had been stoked by comments from San Francisco Federal Reserve Bank President John Williams who said on Thursday the Fed could begin easing its monetary stimulus in the summer and end bond buying late this year.

The Fed's purchases of $85 billion a month in bonds have helped trigger a global scramble for yield that has fuelled this year's massive rally in stocks.

"Opportunity cost is very much in favor of equities, and therefore when you have seen any weakness ... immediately you have big program trades buying," said Geoffroy Goenen, head of thematic European equity management at Dexia Asset Management.

"Equities are the only play in town for investors and even if the Fed becomes less accommodative after the summer, the central banks will still be supportive and interest rates are still low."

Thursday also saw calls from a trio of hawkish regional Federal Reserve officials for the U.S. central bank to stop buying mortgage-backed bonds.

The Bund future rose as much as 40 ticks to 145.71 on talk of a deposit rate cut into negative territory, effectively meaning banks would have to pay to park cash securely overnight at the ECB rather than lending it out.

"It is probably still the easiest of policy options (in terms of) unconventional measures," one trader said.

"If we do get some sort of deterioration (in the euro zone economy) I think it's likely we get negative rates and it's giving Bunds a bit of a bid today."

The Bund future made its biggest gain in six weeks on Thursday as weak U.S. economic data cast doubt on the strength of the recovery there and kept pressure on the Fed to keep its money-printing press running.

The data also knocked stocks and the dollar ahead of the Fed officials' comments, and concerns about future demand growth continued to limit gains in oil on Friday.

Brent crude edged above $104 a barrel, rebounding from an early decline and on track for a small weekly gain.

Copper rose 0.8 percent supported by tentative signs of better metals demand in top consumer China, but gains were capped by a stronger dollar and persistent worries about Chinese economic growth.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> fell 0.4 percent to 479.33.

(Additional reporting by Atul Prakash; Editing by Catherine Evans)

Source: http://news.yahoo.com/dollar-firmer-fed-remarks-asian-shares-mixed-043219740.html

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