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LONDON (Thomson Financial) - European government bonds continued to slide as stock markets rose strongly in the absence of any US trading, closed for President's Day.

The rise in prices is partly magnified by a lack of trading volume as US markets remain closed, but the improved sentiment has caused some profit-taking on the gains made last week.

Analysts say this may continue into tomorrow, when economic data will once again be scarce, leaving the stock market to drive bond prices.

"Whether the good mood will prevail of course remains to be seen; but a lack of A-list US economic data releases this week could mean that fears of a US recession -- whose odds have undoubtedly shortened following Friday's poor batch of US economic figures -- may linger on in investors' minds," said Neil Mellor at Bank of New York Mellon.

The markets are pricing in about 100 basis points-worth of cuts by the Federal Reserve by year-end, a view that has been cemented by the weak US economic data last week.

Looking at the days to come, the US will remain a key focal point, with inflation, housing starts and the Fed minutes due on Wednesday.

John Davies at WestLB believes the overall trend in US economic data "will continue to signal a recession."

"Growth in consumer prices probably accelerated again in January due to the higher energy prices... (but) the Fed will continue to weight growth risks more heavily than inflation risks," said Davies.

In both the US and Europe, bond prices will continue to show a steepening in their yield curve -- as shorter-dated maturities perform better than longer-dated ones on views that interest rates will be cut in the short-term.

In the UK, gilts were also lower, tracking the wider economy in the wake of the news that Northern Rock PLC, the troubled bank, will be nationalised.

Stephen Lewis at Insinger de Beaufort believes there will be little impact on debt markets.

"A more significant issue than Northern Rock for gilts-holders is the ongoing debate about the future liabilities of defined benefit pension schemes," he said.

The UK Pensions Regulator will publish proposals this week to reform the pensions benefit plans to account for greater longevity of beneficiaries, effectively increasing liabilities for pension funds by six to eight percent.

"More funds are, therefore, likely to be channeled into gilts than would otherwise have been the case," said Lewis.

At Yield Change on

1555 GMT pct previous close

March euribor future (Liffe) 95.66 dn 0.01

June euribor future (Liffe) 96.04 dn 0.05

GERMANY

March bund future (Eurex) 116.02 dn 0.41

4.00 pct Jan 2018 govt bond 99.94 4.00 dn 0.39

FRANCE

4.25 pct Oct 2017 govt bond 100.95 4.13 dn 0.39

ITALY

5.25 pct Feb 2018 govt bond 101.31 4.38 dn 0.28

UK

March gilt future 109.25 dn 0.25

5.00 pct March 2018 govt bond 102.88 4.64 dn 0.29

March short sterling future 94.37 dn 0.01

June short sterling future 94.77 dn 0.04

LONDON (Thomson Financial) - The euro fell in afternoon trade with rising risk aversion and a lack of data wiping out earlier gains.

The currency had risen earlier in the day following comments from European Central Bank president Jean-Claude Trichet that there had been no discussion of interest rate cuts at the governing council's meeting last week when rates were left on hold at 4.00 pct. However analysts said that other recent comments from ECB officials coupled with evidence that euro zone economic activity is starting to wane mean the comments did little to later expectations that rates are set to fall in the coming months.

"While Trichet might have been trying to temper rate cut expectations, the less hawkish hue of the ECB last week suggests that the ground work is being

prepared for a rate cut," said analysts at BNP Paribas.

Several major European banks, including UBS and Commerzbank are due to publish results this week which will be closely eyed to see to what extent the subprime losses of US banks are mirrored across the Atlantic.

"Rising risk aversion through greater write-downs would provide support for the dollar against the euro," said the BNP Paribas analysts.

Stocks on Wall Street have also opened down this afternoon, with the dollar and yen gaining on the back of rising risk aversion. This was partly driven by an announcement from American International Group Inc that it has more mortgage debt to write off then previously announced.

Ashraf Laidi, currency strategist at CMC Markets, said Wednesday's release of US January retail sales figures will be key in determining the direction of equity markets this week, which will have a knock-on effect on risk aversion and currencies.

If sales recover after posing a 0.4 pct fall in December then stocks could well receive a much-needed boost.

Meanwhile the pound slipped back a touch after earlier gains, which came on the back of figures showing UK producer prices soared during January.

Output prices rose a monthly 1.0 pct after a 0.4 pct increase in December, the highest monthly rise since January 1995 and well above analyst expectations for another 0.4 pct increase. Input prices rose by 2.6 pct in January from December, far above analyst expectations for a 1.3 pct rise.

Analysts said the numbers signal consumer price inflation could pick up sharply in the coming months, limiting the Bank of England's ability to cut interest rates.

"Today's data will likely add to the already elevated CPI price inflation, and hence we expect the MPC to emphasize upside risks to inflation in its Inflation Report this Wednesday," said Alina Anishchanka, currency strategist at UBS.

Tomorrow sees the release of consumer price inflation data for January, with the annual headline rate expected to have risen to 2.3 pct from 2.1 pct in December.

London 1552 GMT London 1245 GMT

US dollar

yen 106.66 down from 106.73

sfr 1.1038 up from 1.0988

Euro

usd 1.4484 down from 1.4551

yen 154.54 down from 155.31

sfr 1.5993 up from 1.5989

stg 0.7440 down from 0.7470

Sterling

usd 1.9465 down from 1.9478

yen 207.66 down from 207.90

sfr 2.1490 up from 2.1403

Australian dollar

usd 0.9029 down from 0.9100

stg 0.4639 down from 0.4644

yen 96.35 down from 96.54

LONDON (Thomson Financial) - The dollar rebounded against the euro and the pound, with the falls in the wake of a woeful survey on US services sector activity proving short-lived on the widely accepted view that the slowdown is not confined to the US.

The US ISM non-manufacturing business activity index tumbled to 41.9 in January from 54.4, confounding forecasts for a much smaller fall to 53.0 and the worst reading since the aftermath of the Sept 11, 2001, terrorist attacks. The new composite index -- derived from detailed questions on new orders, employment and so on -- was only a little better, falling to 44.6.

The fall also takes the index way below the 50 level that marks contraction in the sector.

"While today's report is the second major confirmation that the US economy is in recession, the US dollar remains little fazed on the premise that the US slowdown is less likely to be isolated," said Ashraf Laidi at CMC Markets.

Earlier today, the PMI index on euro zone services showed the sector close to contraction in January, with the final estimate revised down sharply to 50.6, the weakest level in four and a half years.

The euro fell to a 12-day low against the dollar of 1.4630 usd after short-lived rises in the wake of the US ISM release.

With renewed falls on equity markets and a rise in risk appetite, however, one currency to benefit was the low-yielding yen, often seen as a default safe-haven currency, along with the Swiss franc.

"Renewed declines in equities are expected to drag down risk appetite, which should further weigh on the high yielding currencies against the dollar, leaving dollar/yen as the main dollar pair under pressure," Laidi said.

The market will also be keeping half an eye out for the results in the US primaries later tonight.

London 1550 GMT London 1248 GMT

US dollar

yen 106.85 down from 107.46

sfr 1.1011 down from 1.1026

Euro

usd 1.4644 down from 1.4681

stg 0.7452 down from 0.7459

yen 156.40 down from 157.79

sfr 1.6127 down from 1.6189

Sterling

usd 1.9646 down from 1.9680

yen 209.77 down from 211.48

sfr 2.1628 down from 2.1697

Australian dollar

usd 0.8966 down from 0.9026

stg 0.4565 down from 0.4585

yen 95.77 down from 96.98

EURO

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4735 level and was supported around the $1.4590 level. Stops were reached above the $1.4710 level, representing the 61.8% retracement of the move from $1.4920 to $1.4365. The common currency scored gains after the German January Ifo business climate index improved to 103.4 from 103.0 in December, more-than-expected, with the business assessment sub-index and the business expectations sub-index both stronger. The euro largely shrugged off news that a single trader at Societe Generale committed a massive €4.9 billion fraud. Spanish finance minister Solbes said there is “significant debate” within the ECB on whether to cut interest rates while ECB member Bini-Smaghi said the eight Mediterranean countries that form the majority of the fifteen-member ECB are more at risk from an economic slowdown than Germany and the Benelux countries. In U.S. news, the fed funds future market is pricing in about an 81% chance the Fed will reduce its federal funds target rate another 75bps next week to 2.75% following this week’s 75bps intermeeting cut. There is about a 122% chance the Fed will cut by 50bps according to the future market. Data released in the U.S. today saw weekly initial jobless claims fall 1,000 to 301,000 while continuing jobless claims fell 75,000 to 2.672 million. Also, December existing home sales fell 2.2% m/m to an annualized rate of 4.89 million units and were down 22.0% y/y. Euro bids are cited around the US$ 1.4355 level.

JPN/CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥105.95 level and was capped around the ¥106.95 level. Traders continue to buy the yen on account of elevated global risk aversion stemming from recent heightened volatility in the financial markets. The yen benefits from such risk aversion because the yen is used a funding vehicle in short yen carry trades in which the yen is borrowed and proceeds are invested in higher-yielding currencies. When assets in higher-yielding currencies depreciate, there is less incentive to sell yen in the market and correspondingly, the yen appreciates. Data released in Japan overnight saw the December merchandise trade surplus fall for the second consecutive month, off 20.9% y/y to ¥877.87 billion and an acceleration from November’s 12.2% y/y decline. In political news, LDP officials urged Prime Minister Fukuda to take measures to support the declining stock market as fears mount of a global recession. The Nikkei 225 stock index gained 2.06% to close at ¥13,092.78. Dollar bids are cited around the ¥104.20 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥157.35 level and was supported around the ¥154.85 level. The British pound and Swiss franc gained ground vis-à-vis the yen as the crosses tested offers around the ¥210.40 and ¥98.20 levels, respectively. In Chinese news, many Chinese economic data were released today. First, 2007 GDP was up 11.4% with Q4 GDP up an annualized 11.2%. Second, 2007 retail sales expanded 16.8% to CNY 8.92 trillion. Third, 2007 PPI was up 3.1% after December’s 5.4% y/y increase. Fourth, 2007 CPI was up 4.8% y/y after December’s 6.5% rise.

STERLING

The British pound came rallied significantly vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.9700 figure and was supported around the $1.9500 figure. Sterling benefited from increased speculation that Bank of England may hold rates steady in February despite a slowing global economy. Data released in the U.K. today saw BBA December mortgage approvals fall to an all-time low while underlying mortgage lending was steady at ₤4.7 billion. Cable bids are cited around the US$ 1.9260 level. The euro fell vis-à-vis the British pound as the single currency tested bids around the ₤0.7460 level and was capped around the ₤0.7490 level.

SWISS

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0865 level and was capped around the CHF 1.0935 level. Technically, today’s intraday high were right around the 50% retracement of the move from CHF 1.0835 to CHF 1.1120. U.S. dollar offers are cited around the CHF 1.1155 level. The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.6020 and CHF 2.1430 levels, respectively.

On Wednesday, the single currency again traded as a kind of carry trade currency, at least in relation to the dollar and the yen. The poor performance of stock markets during the morning session in Europe and the losses at the open in the US made EUR/USD to give back half of Tuesday gains and pair reached an intraday low in the 1.4510-area. The gradual improvement of US stocks later in the session helped the pair to return above the 1.46 mark and the pair still trades in that area this morning. The European eco data (PMI, slightly better than expected) and the speech of Mr. Trichet had no lasting impact on trading.

Today, the IFO business confidence will be on to the agenda. In the recent past, the IFO had no material impact on the currency market, but in the current juncture it deserves some more attention as it could impact the market expectations on the ECB interest rate path going forward. In the US, the claims and the existing home sales are on the agenda, but those series are of second tier importance for the currency market.

The plans on how to support (bail out?) the monoline insurers and the way it will (or won’t) be able to calm the storm on the stock market will be the most important driver for global markets and also for the currency market. Looking at the developments in the US yesterday evening and in Asia this morning, investors apparently are cautiously positive and this should give the single currency support at the start of the session.

The key question for global market remains whether the Fed action on Tuesday and the plans to support the monoliners will be enough to calm the markets in a sustainable way. Short-term spots of market nervousness will continue to trim the rebound of the single currency. However, longer term, the rising interest rate support should continue to give the euro decent downside protection.

Recently, we turned more cautious on EUR/USD. However, Tuesday’s rebound after the Fed rate cut and yesterday’s intraday rebound show that the 1.43 range bottom is not really in danger. So, we are more confident on our long standing buy EUR/USD on dips strategy in case of corrections lower in the 1.43/1.4968 trading range. Renewed stock market uncertainty in this respect might provide short term buying opportunities in EUR/USD to play the trading range from the downside. We maintain stop-loss protection in case of a drop below the 1.43 range bottom.

Lingering doubts mostly on the European stock markets (despite the Fed action on Tuesday) yesterday morning helped the yen to set a minor reaction high against the dollar (USD/JPY tested the 105-area). Against the euro, the yen was not able to do so. However improved stock market sentiment helped both USD/JPY and EUR/JPY to stage a good rebound later in the session. However, no important technical levels are regained yet. This morning, the Japanese trade balance came in weaker than expected, as did the all industry activity index. A group of LDP lawmakers made pro- posals to support the Japanese stock markets, but markets are far from convinced that any of these proposals will materialize anytime soon.

We have a standing negative bias for USD/JPY, but turned more cautious ahead of the key levels in USD/JPY and EUR/JPY last week. For EUR/JPY, the break below the sideway range (158.70-area) is confirmed and also USD/JPY holds below the 107.22 previous low, even after Fed action and the current stock market rebound. A cooling of the stock market tensions could take some of the shine of the yen short-term. However, recently the yen negative corrections remained rather limited. The standing yen uptrend is not questioned at all. The technical picture of the stock markets remains the key driver for the yen. Major stock markets (including the S&P), even after yesterday’s rebound, remain below key support levels. So, the theme of risk avers investor behaviour is not out of the way at all. In a day-to-day perspective, the yen momentum may turn softer, but we still see more pronounced up-ticks in USD/JPY as a selling opportunity. A sustained re-break above 107.92 would indicate that the short-term yen momentum is waning and that the correction might have some further to go.

Yesterday, EUR/GBP extended its rebound, after setting a new low on Tuesday morning on global euro weakness in the heat of the stock market sell-off. The UK advanced GDP for the first quarter was slightly better than expected but failed to give the sterling support.

Today, there are no important eco data on the UK calendar. So, global market themes will set the tone for trading.

Looking at the graphs, last week’s downward correction in EUR/GBP halted after the poor UK retail sales report on Friday. The pair over the previous sessions held above the first important support level in the 0.7397/89 area, which is a euro positive from a short-term perspective and suggests that the downside in EUR/GBP is better protected. We hold on to our buy-on dips approach. Medium term, a drop below the 0.7240 previous high would question our longer-term sterling negative view.