Expectations that the European Central Bank could soon cut interest rates boosted investor demand for euro-denominated bonds on Thursday but dragged on the currency against the Japanese yen. European shares rose on good corporate profit news and Japanese stocks closed higher on optimism about the strength of the local economy. With no overarching driver around after days of concern about geopolitical security, markets focused on a variety of factors. In Europe, it was sentiment about future interest rates following a series of statements by ECB officials. "Rate cuts are back on the agenda after the (apparent) change in tone from the ECB and this is helping sentiment," said one government bond trader in London. ECB President Jean-Claude Trichet was quoted this week as saying the bank would reassess its outlook for gradual euro zone recovery if consumer spending fails to pick up. Council member Guy Quaden later said that while rates are very low, there is still room for manoeuvre.
Lower interest rates make existing bond yields more attractive but tend to weaken the relevant currency because higher returns are available elsehwere. Demand for short-dated euro zone government bonds increased. The two-year Schatz yield was down 2.5 basis points at 2.021 percent. The 10-year bond yield was slightly lower at 3.848 percent. The euro was up slightly against the dollar but slipped at one point to a four-month low against the yen , which was flat against the dollar . The euro was at $1.2147 and 129.08 yen. The dollar was at 106.19 yen.
STOCKS
The yen was buoyed by mounting optimism for the Japanese economy, which also lifted Tokyo shares. Government data showed Japan's trade surplus rose more strongly than expected in February, suggesting an export-led recovery is on track. "The basic tone of the market is very strong," said Masaki Iso, chief investment officer at Yasuda Asset Management. The Nikkei average <.N225> ended the session up 1.46 percent at 11,530.91, its highest closing level since March 9. The broader TOPIX index <.TOPX> rose 1.23 percent to 1,160.00, its highest level since August 22, 2001. European shares also rose robustly, lifted by corporate news such as solid earnings from Swiss Re and bright spots in the retail sector. The DJ Euro Stoxx 50 index <.STOXX50E> was up 1.6 percent while the FTSE Eurotop 300 <.FTEU3> gained 0.8 percent.///