LONDON, Oct 1 - Signs of economic rebound boosted Japanese stocks on Wednesday but European markets were flat, awaiting a key U.S. manufacturing survey for clues to the strength of recovery in the world-leading U.S. economy. Japanese stocks bounced off six-week lows after a positive "tankan" corporate confidence survey but European shares showed little reaction to a rise in euro zone manufacturing activity. European markets focused instead on the U.S. Institute of Supply Management's survey due at 1400 GMT after disappointing data on Tuesday raised questions over the strength of the U.S. recovery and prospects for corporate earnings.
Concerns about the dollar, still trading close to three-year lows against the yen despite suspected Japanese yen-selling intervention, also kept European equity investors on edge. "The big thing for today is the ISM index, which could come in significantly weak," said Eric Norland, market economist at CDC-IXIS securities in Paris. The Eurozone Purchasing Managers' Index rose to 50.1 in September from 49.1 in August, crossing the 50 line that separates growth from shrinkage. European stocks drew little comfort from the data. The FTSE Eurotop 300 index <.FTEU3> of pan-European blue chip shares was up 0.1 percent while the narrower DJ Euro STOXX 50 index <.STOXX50E> was up 0.11 percent.
"Weak U.S. data on the Chicago Purchasing Management Index yesterday should mean that today's ISM will fall. And, with employment components weak, the market will be nervously eyeing Friday's U.S. payrolls," Bear Stearns investment bank said. The Eurotop index closed lower on Tuesday for the eighth session in a row after the disappointing U.S. data. Earlier, Japanese stocks rose after the Bank of Japan's "tankan" corporate survey showed companies optimistic about business conditions outnumbering the pessimists for the first time in almost three years. The key diffusion index in the "tankan" rose to plus one in September from minus five in June. The Nikkei <.N225> closed up 1.39 percent. The broader TOPIX index <.TOPX> ended 1.09 percent higher. "There's still lots of liquidity in this market and it's now flowing towards domestic stocks in the face of the yen," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
WALL STREET SEEN OPENING HIGHER
U.S. stock index futures were higher in Europe, indicating Wall Street was likely to open higher. "If that ISM number is weaker than expected, which there probably is a good chance it could be, then that is not going to bode well for the market," said Steve Previs, a trader at Jeffries International in London. U.S. stocks fell on Tuesday after the weak Chicago PMI and a fall in consumer confidence. The tech-laced Nasdaq index <.IXIC> fell 2.07 percent and the Dow Jones Industrial average <.DJI> lost 1.12 percent. In the foreign exchange markets, the dollar stayed close to Tuesday's three-year low against the yen with the market still wary of another round of Japanese intervention.
Japan sold yen for dollars on Tuesday through the New York Fed in their first confirmed intervention since the Group of Seven called on September 20 for flexibility in exchange rates. "Japan has made clear that it doesn't want the yen to appreciate but the market senses that it is fighting a trend and may not be successful," said Ian Gunner, head of foreign exchange at Mellon in London. The dollar was last at 111.01 yen , down a quarter of a percent. Japan was suspected to have been buying dollars at around 111.10 yen on Wednesday. The dollar was steady against the euro at $1.1683, having fallen to a three-month low beyond $1.17 on Tuesday. Euro zone government bond yields were slightly lower after a surprise fall in German retail sales gave support to safe-haven euro zone government bonds.
"Because the German in the street can't see a pick-up, these marginal improvements in PMI data don't have much capital for the markets," said Olivier Bonnefoy, fund broker at Fimat International Banque in London. "We're also waiting for the U.S. ISM data later today and with a cautious equity opening in Europe, bonds remained supported." German sales shrank by 0.2 percent on the month in August, against expectations for a flat reading. The two year Schatz yield was down 0.6 basis points at 2.292 percent, still close to a 10-week low of 2.251 percent struck on Tuesday.The benchmark 10-year Bund yield was down 1.4 basis points at 3.996//