With record highs in sight, stocks face roadblocks

NEW YORK (Reuters) - If Wall Street needs to climb a wall of worry, it will have plenty of opportunity next week.

Major U.S. stock indexes will make another attempt at reaching all-time records, but the fitful pace that has dominated trading is likely to continue. Next Friday's unemployment report and the hefty spending cuts that look like they about to take effect will be at the forefront.

The importance of whether equities can reach and sustain those highs is more than Wall Street's usual fixation on numbers with psychological significance. Breaking through to uncharted territory is seen as a test of investors' faith in the rally.

"It's very significant," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

"The thinking is, there's just not enough there for an extended bull run," he said. "If we do break through (record highs), then maybe the charts and price action are telling us there's something better ahead."

Flare-ups in the euro zone's sovereign debt crisis and next Friday's report on the U.S. labor market could jostle the market, though U.S. job indicators have generally been trending in a positive direction.

Small- and mid-cap stocks hit lifetime highs in February. Now the Dow Jones industrial average <.dji> and the S&P 500 <.spx> are racing each other to the top. The Dow, made up of 30 stocks, is about 75 points - less than 1 percent - away from its record close of 14,164.53, which it hit on October 9, 2007. The broader S&P is still 3 percent away from its closing high of 1,565.15, also reached on October 9, 2007.

The advantage may be in the Dow's court. So far in 2013, it has gained 7.5 percent, beating the S&P 500 by about 1 percent.

THE RALLY AND THE REALITY CHECK

The Dow's relative strength owes much to its unique make-up and calculation, as well as to investors' recent preference for buying value stocks likely to generate steady reliable gains, rather than growth stocks.

But the more defensive stance illustrates how stock buyers are getting concerned about this year's rally. While investors don't want to miss out on gains, they're picking up companies that are less likely to decline as much as high-flying names - if a market correction comes.

The Russell Value Index <.rav> is up 7.6 percent for the year so far, outpacing the Russell Growth Index's <.rag> 5.7 percent rise. Within the realm of the S&P 500, the consumer staples sector led the market in February, gaining 3.1 percent.

There is some concern that growth-oriented names are being eclipsed by defensive bets, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati.

"This isn't a be-all and end-all sell signal by any means, but we would feel much more comfortable if some of the more aggressive areas, like technology and small caps, would start to gain some leadership here," Detrick said.

Signs that investors are becoming concerned about the rally's pace is evident in the options market, where the ratio of put activity to call activity has recently shifted in favor of puts, which represent expectations for a stock to fall.

"We are seeing some put hedging in the financials, building up for the past month," said Henry Schwartz, president of options analytics firm Trade Alert in New York.

The put-to-call ratio representing an aggregate of about 562 financial stocks is 1:1, when normally, calls should be outnumbering puts.

Investors have no shortage of reasons to crave the relative safety of blue chips and defensive stocks. Although markets have mostly looked past uncertainty over Washington's plans to cut the deficit, fiscal policy negotiations still pose a risk to equities.

The $85 billion in spending cuts set to begin on Friday is expected to slow economic growth this year if policymakers do not reach a new deal. Markets so far have held firm despite the wrangling in Washington, but tangible economic effects could pinch stock prices going forward.

The International Monetary Fund warned that full implementation of the cuts would probably take at least 0.5 percentage point off U.S. growth this year.

EASY MONEY AND TEPID HIRING

Investors will also take in a round of economic data at a time when concerns are percolating that the market is being pushed up less by fundamentals and more by loose monetary policy around the world.

The main economic event will be Friday's non-farm payrolls report for February. The U.S. economy is expected to have added 160,000 jobs last month, only a tad higher than in January, in a sign the labor market is healing at a slow pace. The U.S. unemployment rate is forecast to hold steady at 7.9 percent.

While lackluster data has been a catalyst in the past for stock market gains as investors bet it would ensure continued stimulus from the Federal Reserve, that sentiment may be wearing thin.

Markets stumbled last week following worries that the Fed might wind down its quantitative easing program sooner than expected.

"It shows the underpinning of the market is being driven at this point by monetary policy," Hellwig said.

With investors questioning what is behind the rally, it will make a run to record highs even more significant, Hellwig added.

"There's smart people that are in the bull camp and the bear camp and the muddle-through camp," Hellwig said. "The fact that you can statistically, using historical evidence, make a case for going higher, lower, or staying the same makes this number very important this time around."

(Wall St Week Ahead runs every Friday. Comments or questions on this column can be emailed to: leah.schnurr(at)thomsonreuters.com)

(Reporting by Leah Schnurr; Additional reporting by Doris Frankel in Chicago; Editing by Jan Paschal)

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Shares, euro recover as markets nervously eye Italy

LONDON (Reuters) - European shares, the euro and commodities edged higher on Thursday as sentiment improved across riskier asset markets but concerns over the political stalemate in Italy limited gains.

Investors are nervous over whether the political gridlock that emerged from the Italian elections could hurt euro zone growth, and if support from the European Central Bank for a nation in trouble can be used if there's no workable government.

A raft of euro zone officials are due to make public speeches during the day which will be closely watched, while limited data on euro area inflation for January and the latest German unemployment data for February are unlikely to have much impact.

"I can't see any game changing growth numbers, I can't see a policy response to the Italian elections from the ECB, and I can't see any imminent headlines from Italy that will suggest some progress," said Jack Kelly, Investment Director, Global Government Bonds at Standard Life Investments.

Meanwhile markets were supported by reassuring comments from U.S. Federal Reserve Chairman Ben Bernanke on continued monetary easing, and Wednesday's smooth debt sale by Italy.

The MSCI's world equity index <.miwd00000pus> rose 0.5 percent after a strong session on Wall Street and big gains in Hong Kong and Tokyo earlier in the day as the Fed's commitment to existing stimulus measures soothed the concerns over Italy.

Europe's broad FTSE Eurofirst 300 index <.fteu3> opened up about 0.5 percent, while London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> were similarly around 0.5 percent higher. <.l><.eu/>

A 0.1 percent rise in U.S. stock futures also hinted at a firm Wall Street start. <.n/>

The recovery in equity markets weighed on demand for safe haven investments like German government bonds, sending Bund futures down around 13 ticks.

In the currency markets the yen was slightly weaker after Japanese Prime Minister Shinzo Abe nominated Asian Development Bank President Haruhiko Kuroda, a strong supporter of easier monetary policy, to be the next Bank of Japan governor.

The euro was little changed at around $1.3137, having recovered much of the sharp losses made after the inconclusive Italian elections, which had taken the currency down to an eight-week low of $1.3018 on Tuesday.

Commodities were also generally firmer with U.S. crude up 0.25 percent to $92.54 a barrel while Brent was barely changed at $111.89.

Gold managed a slight rise to be around $1,600 an ounce but was headed for its longest stretch of monthly declines in more than 16 years as an improving economic outlook dimmed its safe-haven appeal.

(Reporting by Richard Hubbard; Editing by Peter Graff)

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Bernanke says Fed stimulus benefits clear, downplays risks

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke strongly defended the U.S. central bank's monetary stimulus before Congress on Tuesday, easing financial market worries over a possible early retreat from bond buys.

The Fed chairman also urged lawmakers to avoid sharp spending cuts set to go into effect on Friday, which he warned could combine with earlier tax increases to create a "significant headwind" for the modest economic recovery.

Bernanke said Fed policymakers are cognizant of potential risks from their extraordinary support for the economy, including the possibility that it might fuel unwanted inflation or stoke asset bubbles.

But, in testimony on the central bank's semi-annual report on monetary policy, he said the risks did not seem material at the moment, adding the central bank has all the tools it needs to retreat from its monetary support in a timely fashion.

"To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation," Bernanke told the Senate Banking Committee.

In response to the financial crisis and deep recession of 2007-2009, the Fed not only slashed official interest rates to effectively zero but also bought more than $2.5 trillion in mortgage and Treasury debt in an effort to push down long-term interest rates and spur hiring.

The Fed is currently buying $85 billion in bonds each month and has said it plans to keep purchasing assets until it sees a substantial improvement in the outlook for the labor market.

Minutes of the Fed's January 29-30 policy meeting, released last week, showed a number of officials felt the potential risks posed by the bond purchases could warrant tapering or ending them before hiring picks up. However, several others argued there was a danger in halting them prematurely.

Bernanke appeared to be in the latter camp. "The benefits of asset purchases, and of policy accommodation more generally, are clear," he said, citing improvements in the housing and auto sectors and tracing them in part to the Fed's stimulus.

"There is no risk-free approach to this situation," he said. "The risk of not doing anything is severe as well. So, we are trying to balance these things as best we can."

NO SHIFT IN POLICY COURSE

The testimony helped offset jitters in U.S. stock markets over Europe's debt crisis, with major indexes rising in the afternoon, while bond prices fell.

"What Bernanke is saying, bottom line, indicates that there will not be a reversal anytime soon in the stimulus program," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

When asked pointedly by Republican Senator Bob Corker about whether the Fed's easy monetary policy was contributing to competitive currency devaluations globally and laying the groundwork for inflation, Bernanke was unequivocal.

"My inflation record is the best of any Federal Reserve chairman in the post-war period," he retorted. "We are not engaged in a currency war."

Democrats, for their part, seized on Bernanke's remarks to fuel their argument that looming budget cuts could have a dire economic impact, as they sought to gain political advantage over Republicans, who would rather see spending cuts than higher taxes.

Committee newcomer Elizabeth Warren, a Democrat, pressed Bernanke on what she said is an implicit subsidy that large banks receive in the form of lower borrowing costs from being perceived as too big to fail.

Bernanke countered that Dodd-Frank financial reform rules had given regulators more power to wind down failing financial institutions, making the issue less of a concern.

"The subsidy is coming because of market expectations that the government would bail out these firms if they fail. Those expectations are incorrect," Bernanke said.

A PLEA ON BUDGET CUTS

In unusually direct remarks on fiscal policy, Bernanke warned the near-term spending cuts known as the sequester, which are set to take hold later this week, would threaten an already challenged economic expansion.

"The Congress and the administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration, with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run," Bernanke said.

The U.S. economy braked sharply in the fourth quarter, but is forecast to grow around 2 percent or more this year. The unemployment rate has remained elevated, and registered 7.9 percent in January.

Bernanke, who appears for a second day of testimony before a House of Representatives panel on Wednesday, said persistent joblessness was a scourge with potentially long-lasting effects.

"High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole," Bernanke said.

The central bank's semi-annual report also downplayed the possibility the Fed's bond-buying might be stoking asset bubbles in certain markets.

"There has been limited evidence so far of excessive buildups of duration, credit risk, or leverage, but the Federal Reserve will continue both its careful oversight and its implementation of financial regulatory reforms designed to reduce systemic risk," it said.

(Reporting by Pedro Nicolaci da Costa; Editing by Andrea Ricci)

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World shares slide on Italy vote, German Bunds gain

LONDON (Reuters) - Italy's inconclusive election result sparked a selloff on world equity markets on Tuesday and sent safe-haven German bond yields sharply lower as investors feared a resurgence of the euro zone debt crisis.

The euro briefly touched a seven-week low against the dollar to trade near $1.30 after no clear majority emerged from the vote, raising the prospect of weeks of political uncertainty and potentially another election later in the year.

"This is the worst possible outcome from the market's point of view," said Alessandro Tentori, Citigroup's head of global rates.

Yields on 10-year Italian government bonds jumped 45 basis points to 4.82 percent while Italy's main stock market index <.ftmib> tumbled five percent with shares in some of the country's major banks down over 10 percent.

Other European markets were also slumping, with London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> down as much as 2.5 percent. The pan-European FTSEurofirst 300 index <.fteu3> was down 1.3 percent. <.eu/>

Italy's centre-left bloc led by Pier Luigi Bersani narrowly won control of the lower house but no party or coalition appeared to be in a position to take a majority in the equally powerful Senate. A party led by the anti-establishment comic Beppe Grillo gained more than 25 percent of the vote.

"The very close result and the stalemate between the two houses of parliament point to a non-trivial risk of new elections," Holger Schmieding, chief economist at Berenberg Bank, adding there was also a small risk that new elections could lead to a referendum in Italy on the euro.

The euro steadied at around $1.3080, up about 0.15 percent after falling as low as $1.3039, its lowest since January 10.

The focus will now be on an Italian treasury bill auction later, when Rome's borrowing costs could rise.

Ahead of the auction investors were showing a clear preference for safety, with the yield down 8 basis points at 1.5 percent on 10-year German bonds, while riskier Spanish and Portuguese bonds were coming under heavy selling pressure.

Elsewhere investors were awaiting testimony later in the day from U.S. Federal Reserve Chairman Ben Bernanke for further clues to when the central bank intends to slow down or stop its bond-buying program.

Financial markets were rattled last week by minutes of the Fed's January meeting showing some Fed officials were thinking of scaling back its monetary stimulus earlier than expected.

U.S. stock futures were flat to suggest a cautious Wall Street start. <.l><.eu><.n/>

(Reporting by Richard Hubbard. Editing by Alastair Macdonald)

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Investors face another Washington deadline

NEW YORK (Reuters) - Investors face another Washington-imposed deadline on government spending cuts next week, but it's not generating the same level of fear as two months ago when the "fiscal cliff" loomed large.

Investors in sectors most likely to be affected by the cuts, like defense, seem untroubled that the budget talks could send stocks tumbling.

Talks on the U.S. budget crisis began again this week leading up to the March 1 deadline for the so-called sequestration when $85 billion in automatic federal spending cuts are scheduled to take effect.

"It's at this point a political hot button in Washington but a very low level investor concern," said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. The fight pits President Barack Obama and fellow Democrats against congressional Republicans.

Stocks rallied in early January after a compromise temporarily avoided the fiscal cliff, and the Standard & Poor's 500 index <.spx> has risen 6.3 percent since the start of the year.

But the benchmark index lost steam this week, posting its first week of losses since the start of the year. Minutes on Wednesday from the last Federal Reserve meeting, which suggested the central bank may slow or stop its stimulus policy sooner than expected, provided the catalyst.

National elections in Italy on Sunday and Monday could also add to investor concern. Most investors expect a government headed by Pier Luigi Bersani to win and continue with reforms to tackle Italy's debt problems. However, a resurgence by former leader Silvio Berlusconi has raised doubts.

"Europe has been in the last six months less of a topic for the stock market, but the problems haven't gone away. This may bring back investor attention to that," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

OPTIONS BULLS TARGET GAINS

The spending cuts, if they go ahead, could hit the defense industry particularly hard.

Yet in the options market, bulls were targeting gains in Lockheed Martin Corp , the Pentagon's biggest supplier.

Calls on the stock far outpaced puts, suggesting that many investors anticipate the stock to move higher. Overall options volume on the stock was 2.8 times the daily average with 17,000 calls and 3,360 puts traded, according to options analytics firm Trade Alert.

"The upside call buying in Lockheed solidifies the idea that option investors are not pricing in a lot of downside risk in most defense stocks from the likely impact of sequestration," said Jared Woodard, a founder of research and advisory firm condoroptions.com in Forest, Virginia.

The stock ended up 0.6 percent at $88.12 on Friday.

If lawmakers fail to reach an agreement on reducing the U.S. budget deficit in the next few days, a sequester would include significant cuts in defense spending. Companies such as General Dynamics Corp and Smith & Wesson Holding Corp could be affected.

General Dynamics Corp shares rose 1.2 percent to $67.32 and Smith & Wesson added 4.6 percent to $9.18 on Friday.

EYES ON GDP DATA, APPLE

The latest data on fourth-quarter U.S. gross domestic product is expected on Thursday, and some analysts predict an upward revision following trade data that showed America's deficit shrank in December to its narrowest in nearly three years.

U.S. GDP unexpectedly contracted in the fourth quarter, according to an earlier government estimate, but analysts said there was no reason for panic, given that consumer spending and business investment picked up.

Investors will be looking for any hints of changes in the Fed's policy of monetary easing when Fed Chairman Ben Bernake speaks before congressional committees on Tuesday and Wednesday.

Shares of Apple will be watched closely next week when the company's annual stockholders' meeting is held.

On Friday, a U.S. judge handed outspoken hedge fund manager David Einhorn a victory in his battle with the iPhone maker, blocking the company from moving forward with a shareholder vote on a controversial proposal to limit the company's ability to issue preferred stock.

(Additional reporting by Doris Frankel; Editing by Kenneth Barry)

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Investors face another Washington deadline

NEW YORK (Reuters) - Investors face another Washington-imposed deadline on government spending cuts next week, but it's not generating the same level of fear as two months ago when the "fiscal cliff" loomed large.

Investors in sectors most likely to be affected by the cuts, like defense, seem untroubled that the budget talks could send stocks tumbling.

Talks on the U.S. budget crisis began again this week leading up to the March 1 deadline for the so-called sequestration when $85 billion in automatic federal spending cuts are scheduled to take effect.

"It's at this point a political hot button in Washington but a very low level investor concern," said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. The fight pits President Barack Obama and fellow Democrats against congressional Republicans.

Stocks rallied in early January after a compromise temporarily avoided the fiscal cliff, and the Standard & Poor's 500 index <.spx> has risen 6.3 percent since the start of the year.

But the benchmark index lost steam this week, posting its first week of losses since the start of the year. Minutes on Wednesday from the last Federal Reserve meeting, which suggested the central bank may slow or stop its stimulus policy sooner than expected, provided the catalyst.

National elections in Italy on Sunday and Monday could also add to investor concern. Most investors expect a government headed by Pier Luigi Bersani to win and continue with reforms to tackle Italy's debt problems. However, a resurgence by former leader Silvio Berlusconi has raised doubts.

"Europe has been in the last six months less of a topic for the stock market, but the problems haven't gone away. This may bring back investor attention to that," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

OPTIONS BULLS TARGET GAINS

The spending cuts, if they go ahead, could hit the defense industry particularly hard.

Yet in the options market, bulls were targeting gains in Lockheed Martin Corp , the Pentagon's biggest supplier.

Calls on the stock far outpaced puts, suggesting that many investors anticipate the stock to move higher. Overall options volume on the stock was 2.8 times the daily average with 17,000 calls and 3,360 puts traded, according to options analytics firm Trade Alert.

"The upside call buying in Lockheed solidifies the idea that option investors are not pricing in a lot of downside risk in most defense stocks from the likely impact of sequestration," said Jared Woodard, a founder of research and advisory firm condoroptions.com in Forest, Virginia.

The stock ended up 0.6 percent at $88.12 on Friday.

If lawmakers fail to reach an agreement on reducing the U.S. budget deficit in the next few days, a sequester would include significant cuts in defense spending. Companies such as General Dynamics Corp and Smith & Wesson Holding Corp could be affected.

General Dynamics Corp shares rose 1.2 percent to $67.32 and Smith & Wesson added 4.6 percent to $9.18 on Friday.

EYES ON GDP DATA, APPLE

The latest data on fourth-quarter U.S. gross domestic product is expected on Thursday, and some analysts predict an upward revision following trade data that showed America's deficit shrank in December to its narrowest in nearly three years.

U.S. GDP unexpectedly contracted in the fourth quarter, according to an earlier government estimate, but analysts said there was no reason for panic, given that consumer spending and business investment picked up.

Investors will be looking for any hints of changes in the Fed's policy of monetary easing when Fed Chairman Ben Bernake speaks before congressional committees on Tuesday and Wednesday.

Shares of Apple will be watched closely next week when the company's annual stockholders' meeting is held.

On Friday, a U.S. judge handed outspoken hedge fund manager David Einhorn a victory in his battle with the iPhone maker, blocking the company from moving forward with a shareholder vote on a controversial proposal to limit the company's ability to issue preferred stock.

(Additional reporting by Doris Frankel; Editing by Kenneth Barry)

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Asian shares recover from steep loss, growth worry caps

TOKYO (Reuters) - Asian shares recouped some of the previous session's steep falls as investors reassessed fears of the Federal Reserve ending its ultra-soft monetary policy earlier than expected, but weak U.S. and European data capped Friday's recovery.

European markets are seen rebounding, with financial spreadbetters predicting London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> would open up as much as 0.6 percent. U.S. stock futures were up 0.3 percent to suggest a solid Wall Street start. <.l><.eu><.n/>

The dollar lost 0.3 percent against a basket of currencies <.dxy>, pulling away from a 5-1/2-month high hit on Thursday, as data showing weak business conditions in parts of the United States and across Europe pushed out expectations of any policy tightening.

"It's unlikely that the Fed would begin to wind down its QE (quantitative easing) program until the U.S. economic growth is improving at a faster rate than currently," said Ric Spooner, chief market analyst at CMC Global Markets in Sydney.

Most risk assets had slid to their lows for 2013 on Thursday, in part because of worries the Fed could prematurely paring back its bond buying program. But the weak data in the United States and Europe saw that view quickly reconsidered.

Gold rose 0.5 percent to $1,582.96 an ounce after having hit a seven-month high on Thursday.

Tokyo's Nikkei stock average <.n225> closed up 0.7 percent, reclaiming about half of Thursday's drop.

The MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> was up 0.2 percent. However, that was only a fraction of its 1.5 percent tumble on Thursday, and the index was set for a weekly loss of 0.8 percent.

Upbeat comments from the central bank governor helped Australian shares <.axjo> jump 0.8 percent, with investors buying back after stocks slumped 2.3 percent on Thursday.

Hong Kong shares <.hsi> bucked the regional trend and fell 0.3 percent while Shanghai shares <.ssec> inched up 0.1 percent.

"In America they're kind of revealing that actually the next thing we need to do is start tightening, and that's why global stocks are very volatile at the moment and we're going to be caught up in that," said Damien Boey, equity strategist at Credit Suisse.

The euro rose from multi-week lows hit on Thursday, gaining 0.4 percent to 123.22 yen. The dollar inched up 0.2 percent against the yen to 93.26.

London copper climbed 0.9 percent to $7,934 a metric ton, after posting its biggest single-day slide this year on Thursday.

Crude oil futures also recovered from Thursday's sell-off, with U.S. crude up 0.3 percent to $93.11 a barrel and Brent rising 0.5 percent to $114.05.

"After the Fed, people seemed to have a little less conviction that we are going to see indefinite low dollar rates, which have attracted a lot of interest in commodities, especially precious metals. But the macro picture hasn't changed tremendously and the underlying demand is still strong," a Hong Kong trader said.

U.S. 10-year Treasury yields were a tad higher in Asia, having eased in the previous session.

The German Ifo business sentiment index at 0900 GMT should offer more clues on the health of European economy, but overall sentiment is expected to remain cautious ahead of elections in Italy over the weekend.

Most investors expect a centre-left government to win and continue with reforms to tackle Italy's debt problems. But a resurgence of former leader Silvio Berlusconi has raised new worries.

(Additional reporting by Thuy Ong in Sydney and Florence Tan and Rujun Shen in Singapore; Editing by John Mair)

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Doubt on Fed easing hits shares, commodities

LONDON (Reuters) - World share markets fell and the dollar and safe-haven assets rose on Thursday, a day after minutes of the Federal Reserve's last policy meeting cast doubts over how much longer the U.S. central bank would stick to its stimulus plan.

After the minutes were released the euro skidded to a six-week low against the dollar of $1.3235, Asian shares experienced their worst day in seven months and gold hit its lowest price since last July, at $1,554.49 an ounce.

"Disagreement over the current path is causing concern for a market that demands certainty," Ben Taylor, a trader at CMC Markets, said of evidence Fed officials were divided on policy.

MSCI's world equity index <.miwd00000pus>, which only on Wednesday had touched a 4-1/2 year high, fell 0.5 percent as the benchmark S&P 500 index <.spx> suffered its steepest daily percentage decline since mid-November.

European markets joined in the selloff with the FTSE Eurofirst 300 index <.fteu3> shedding 0.5 percent, led lower by the banks <.sxip>, which have been at forefront of recent gains. London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> were all down as much as 0.7 percent.

However, market sentiment could get some support from the release of first reading from February Purchasing Managers' Indexes (PMIs) from across Europe later in the day.

The euro-zone composite PMI is expected to have risen for a fourth consecutive month in February to around 49.0, adding to evidence that economic conditions across the recession-hit region are gradually improving.

The PMI reading would still leave the composite index below the 50 mark which separates expansion from contraction and analysts estimate it would be consistent with a small fall in GDP for a fourth consecutive quarter.

In the fixed income market, German bonds, normally considered a safe haven, saw prices rise with the main Bund futures contract up 30 ticks to 142.85. The move reversed a fall seen on Wednesday but kept the contract within a narrow band before an Italian general election this weekend.

Spain was set to test market sentiment for peripheral euro zone debt with the sale of up to four billion euros of new paper.

The dollar followed up a big gain on Wednesday against a basket of major currencies to add a further 0.1 percent, although it dipped slightly against the yen to 93.41.

Among commodities, London copper struck its lowest in nearly two months, at $7,880 a metric ton, while crude oil extended losses after posting its biggest daily fall so far this year on Wednesday.

(Reporting by Richard Hubbard; Editing by Alastair Macdonald)

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European shares steady awaiting further growth signals

LONDON (Reuters) - European share markets were little changed on Wednesday, awaiting further signs of improving global economic recovery after a big rise in the previous session fuelled by encouraging German data.

The FTSE Eurofirst <.fteu3> index of top European shares was down 0.1 percent in early trading, having gained 1.1 percent on Tuesday, its best day for three weeks <.fteu3>.

London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> were all close to flat. <.eu/>

"I see no reason why we can't consolidate the gains and possibly move higher," said Michael Hewson, an analyst at CMC Markets.

Global share markets surged on Tuesday after forecast-beating German sentiment data pointed to an accelerating recovery in Europe's largest economy.

The data comes ahead of more important euro zone flash Purchasing Managers Indexes on Thursday and a German business sentiment survey on Friday that could show whether the region's recovery is taking hold.

The rising hopes of recovery have been supported on Wall Street by a surge in merger activity that has sent U.S. benchmark shares indexes close to record highs. <.n>.

In Asia, share markets outside Japan are at 18-month highs <.miapj0000pus>, as the relatively stronger growth outlook compared with Europe and the United States has drawn in foreign investors.

The rise in equities has weighed on assets perceived as safe havens, with German Bund futures down 25 ticks in early trade to 142.57, though news that Spain may be about to issue a U.S. dollar bond supported sentiment.

In the currency markets the euro rose 0.2 percent to $1.3413 but sterling fell to its lowest in nearly 16 months against a trade-weighted basket of currencies.

Currency traders have their eyes on central banks and the minutes of policy meetings at the Bank of England and the U.S. Federal Reserve that are due to be published later in the day.

The Bank of England minutes at 0930 GMT may reiterate a tolerance for higher inflation or greater disagreement among policymakers over the value of restarting the bank's asset purchase program.

Commodities markets mostly followed equities higher, with spot gold inching up 0.2 percent to $1,605.90 an ounce but stuck near a six-month low.

London copper edged up 0.2 percent to $8,067.75 a metric ton, off Tuesday's three-week lows but Brent crude was little changed at $117.47 a barrel.

(Additional reporting by Masayuki Kitano in Singapore and Thuy Ong in Sydney; Editing by Eric Meijer)

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Philippine, Aussie shares at new peaks; yen firms

TOKYO (Reuters) - Philippine and Australian shares scaled new heights on Tuesday but other Asian shares were mixed, with worries about the risk of an inconclusive outcome in Italy's election and about U.S. budget talks limiting the upside after strong rallies in early February.

European markets looked set to inch higher, with financial spreadbetters predicting London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> would open up 0.1 percent. <.l><.eu/>

U.S. stock futures rose 0.1 percent to suggest Wall Street will reopen with a firmer tone after the President's Day holiday on Monday. <.n/>

"Markets have become top-heavy after rallying through early February on signs of economic recovery in the United States and Europe, and investors now await fresh factors to push prices higher from here," said Tomomichi Akuta, senior economist at Mitsubishi UFJ Research and Consulting in Tokyo.

"The broad sentiment is underpinned by a lack of tail risks, but investors are turning to some potentially worrying elements such as Italian elections and U.S. budget talks," he said.

The MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> edged up 0.1 percent. Earlier in the day it had touched a 18-1/2-month high. The index has gained 3.5 percent this year.

Shares in the Philippines <.psi>, where a strong economic growth has led to rising interest in the country as an investment destination, hit a record. The Thai index <.seti> was also up 0.3 percent after recent data showed robust fourth-quarter economic numbers.

Australian shares ended 0.4 percent up at a 4-1/2 year high, continuing a recent rally on better-than-expected corporate earnings.

But Hong Kong shares <.hsi> fell 0.2 percent and Shanghai shares <.ssec> shed 1.1 percent, with real estate and financials leading the declines on concerns that rising property prices would lead to fresh restrictions on the sector.

Tokyo's Nikkei stock average <.n225> ended down 0.3 percent, after surging on Monday to approach its highest level since September 2008 of 11,498.42 tapped on February 6. <.t/>

The concerns about Italy's election this weekend and the talks in Washington over a package of budget cuts set to kick in March 1, also helped limit gains in commodities and also weighed on the euro.

The dollar's strength against a basket of currencies <.dxy> capped gains in gold, with the spot price up 0.2 percent at $1,613.01 an ounce.

London copper steadied at $8,122.50 a metric ton as Monday's three-week low drew bargain hunting given prospects for a slowly improving global economic recovery. Unease over China's limp return to the market from a week-long break held back upside momentum, however.

"I think we've already had the nicest rally that we're going to get this year," Singapore-based Credit Suisse analyst Ivan Szpakowski said. "You can still get some more mild upturns, but frankly as you move to the second half of the year industrial metals are going to trend down.

U.S. crude fell 0.5 percent to $95.43 a barrel while Brent steadied around $117.37.

The euro was steady around $1.3348.

YEN JITTERY

Bank of Japan minutes revealed board members had discussed buying longer-dated government debt at their January meeting, sending the yield on five-year Japanese government bonds to record low.

The yen firmed, however, after Finance Minister Taro Aso told reporters Japan has no plans to buy foreign currency bonds as part of monetary easing and as attention remained focused on who will be the next Bank of Japan governor.

The dollar fell 0.3 percent to 93.61 yen, but remained near its highest since May 2010 of 94.465 hit on February 11. The euro eased 0.4 percent to 125.00 yen, below its peak since April 2010 of 127.71 yen touched on February 6

The yen, which has dropped 20 percent against the dollar since mid-November, fell further at the start of the week after financial leaders from the G20 promised not to devalue their currencies to boost exports and avoided singling out Japan for any direct criticism.

The choice of the next BOJ governor and two deputies has drawn attention as a gauge of how strongly Prime Minister Shinzo Abe is committed to reflating the economy. The G20's message was that as long as Japan pursues aggressive monetary easing to achieve that goal, a weaker yen as a result of such domestic monetary policy will be tolerated, analysts say.

"But that means that some other economy's monetary conditions have been tightened," said Barclays Capital in a note.

"Japan hasn't even changed its policy stance thus far, and the effect of expectations of a looser setting have led to limited moves in domestic interest rates, but the sell-off of the JPY has been marked and has clearly caused unease in other economies," the note said.

(Additional reporting by Melanie Burton in Singapore; Editing by Edwina Gibbs)

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Euro, dollar gain after G20, stocks weaker

LONDON (Reuters) - The euro and the dollar gained against the yen on Monday after the G20 decided not to criticize Japan for its expansionary policies, but Europe's weak growth outlook and the approach of Italian elections capped the moves.

Financial leaders from the world's 20 biggest economies promised in their final statement after a weekend meeting not to devalue their currencies to boost exports, in a bid to defuse talk of currency wars among major nations.

The euro gained 0.15 percent to 125.20 yen, edging up toward a 34-month high of 127.71 yen hit earlier this month, while the dollar rose 0.5 percent to 93.99 yen, closer to its highest since May 2010 of 94.46 hit on February 11.

"Future yen direction will continue to be driven by domestic monetary policy from the Bank of Japan and improving international investor confidence, which are both driving the yen weaker," said Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ.

With the G20 meeting over, the focus in European markets is switching to the release of euro area Purchasing Managers' Indexes for February and German sentiment indices due later in the week, and the upcoming general elections in Italy.

Analysts expect the euro area flash PMI indices, which point to economic activity around six months out, to show growth stabilizing rather than a clear end to the current recession across the region.

The FTSEurofirst 300 index <.fteu3> of top European shares opened down 0.1 percent at 1,159.87 points, with Germany's DAX <.gdaxi>, the UK's FTSE <.ftse> and France's CAC-40 <.fchi> flat to slightly weaker. <.l><.eu/>

Earlier, the effect of the G20 statement and further announcements from Japan's Prime Minister Shinzo Abe indicating a renewed drive to stimulate the economy lifted the Nikkei stock index <.n225> by 2.1 percent, near to its highest level since September 2008.

Meanwhile U.S. stock futures were barely changed and are expected to stay little changed as Wall Street will be closed on Monday for the Presidents' Day holiday. <.n/>

In the commodity markets, copper fell 0.7 percent to $8,150 a tonne as traders played catch up after a week-long holiday in China last week, with worries about the euro zone economy weighing on sentiment.

U.S. crude fell 34 cents to $95.50 a barrel but Brent inched up six cents $117.70.

Gold rebounded by 0.3 percent from a six-month low to be $1,614 an ounce as jewelers in China returned to the physical market after the Lunar New Year holiday.

(Reporting by Richard Hubbard. Editing by Giles Elgood)

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After decent rally, perhaps time for a pause

NEW YORK (Reuters) - Stocks could struggle to extend their seven-week winning streak as the quarterly earnings period draws to a close and the market bumps into strong technical resistance.

Many analysts say the market could spend the next few weeks consolidating gains that have lifted the benchmark Standard & Poor's 500 <.spx> by 6.6 percent since the start of the year.

The S&P 500 ended up 0.1 percent for the week, recovering from a late sell-off on Friday after a Bloomberg report about slow February sales at Wal-Mart triggered a slide in the retailer's shares. It was the index's seventh week of gains.

Odds of a pullback are increasing, with the market in slightly overbought territory, said Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston.

"I do suspect the closing of the earnings season will lead to at least a pause and possibly a pullback," Zaro said. The S&P 500 could shave 3 to 5 percent between now and early April, he said.

Fourth-quarter earnings have mostly beaten expectations. Year-over-year profit growth for S&P 500 companies is now estimated at 5.6 percent, up from a January 1 forecast for 2.9 percent growth, and 70 percent of companies are exceeding analyst profit expectations, above the 62 percent long-term average, according to Thomson Reuters data.

On Thursday, Wal-Mart, the world's largest retailer, is due to report results, unofficially closing out the earnings period. Investors will be keen to see its quarterly numbers, especially after the Friday's news report that rattled investors.

The S&P 500 has gained 4.3 percent since Alcoa kicked off the earnings season on January 8.

The approaching March 1 deadline for across-the-board federal budget cuts unless Congress reaches a compromise adds another reason for caution, especially with recent economic data indicating the recovery remains bumpy.

Manufacturing output fell 0.4 percent last month, the Federal Reserve said on Friday, but production in November and December was much stronger than previously thought.

TESTING RESISTANCE

The S&P 500 has been trading near five-year highs, and it notched its highest level since November 2007 this week. But the gains have pushed the benchmark index almost as far as it is likely to go in the near term, with strong resistance hovering around 1,525 and 1,540, one analyst said.

As a result, the index is set to move sideways, said Dave Chojnacki, market technician at Street One Financial in Huntington Valley, Pennsylvania. "We just don't have the volume or the catalyst right now" to go above those levels, he said.

At the same time, other analysts say, the market has not shown significant signs of slowing, including a break below 15- and 30-day moving averages.

Such moves would be needed to show that momentum is slowing or that the market is at risk of a correction, said Todd Salamone, director of research for Schaeffer's Investment Research in Cincinnati, Ohio. The S&P 500's 14-day moving average is at 1,511 while the 30-day is at 1,494. The index closed Friday at 1,519.

Recent M&A activity, including news this week of a merger between American Airlines and US Airways Group , helped provide some strength for the market this week and optimism that more deals may be on the way.

In the coming days, the market will focus on minutes from the latest Federal Reserve meeting, due to be released on Wednesday, which could provide support if they suggest the Fed will remain on its current course of aggressive monetary easing.

The Fed minutes released in January spooked markets a bit when they revealed that some Fed officials thought it would be appropriate to consider ending asset purchases later in 2013. U.S. Treasury yields rose on that news, though market worries about a near-term end to quantitative easing have since faded.

Among other companies expected to report earnings next week are Nordstrom , Hewlett-Packard and Marriott International

(Reporting By Caroline Valetkevitch; Editing by Leslie Adler)

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G20 defuses talk of "currency war", no accord on debt

MOSCOW (Reuters) - The Group of 20 nations declared on Saturday there would be no 'currency war' and deferred plans to set new debt-cutting targets in an indication of concern about the fragile state of the world economy.

Japan's expansive policies, which have driven down the yen, escaped criticism in a statement agreed in Moscow by financial policymakers from the G20, which groups developed and emerging markets and accounts for 90 percent of the world economy.

After late-night talks, finance ministers and central bankers agreed on wording closer than expected to a joint statement issued last Tuesday by the Group of Seven rich nations backing market-determined exchange rates.

A draft communique seen by delegates on Friday had steered clear of the G7's call for fiscal and monetary policy not to be targeted at exchange rates but the final version included a G20 commitment to refrain from competitive devaluations and stated monetary policy would be directed at price stability and growth.

"The language has been strengthened since our discussions last night," Canadian Finance Minister Jim Flaherty told reporters. "It's stronger than it was, but it was quite clear last night that everyone around the table wants to avoid any sort of currency disputes."

The communique, seen by Reuters ahead of publication, did not single out Japan for aggressive monetary and fiscal policies that have seen the yen drop 20 percent.

The statement reflected a substantial, but not complete, endorsement of Tuesday's statement by the G7 nations - the United States, Japan, Britain, Canada, France, Germany and Italy.

"We all agreed on the fact that we refuse to enter any currency war," French Finance Minister Pierre Moscovici told reporters.

NO FISCAL TARGETS

The text also contained a commitment to credible medium-term fiscal strategy, but stopped short of setting specific goals.

A debt-cutting pact struck in Toronto in 2010 will expire this year if leaders fail to agree to extend it at a G20 summit of leaders in St Petersburg in September.

"Advanced economies will develop credible medium-term fiscal strategies ... by the St. Petersburg summit," the communique said.

The United States, which has resorted to massive monetary stimulus and higher government borrowing to drive growth and cut jobless queues, blocked a push from Europe to commit to reducing budget deficits.

Russian Finance Minister Anton Siluanov said the G20 had failed to reach agreement on medium-term budget deficit levels.

"We expect by April countries will have made progress on reaching a balanced approach to establishing new budget indicators on both, deficit and the level of government debt," Siluanov said.

Russia, this year's chair of the G20, also expressed concern about ultra-loose policies that it and other big emerging economies say could store up trouble for later.

Siluanov said a rebalancing of global growth required more than an adjustment of exchange rates.

"Structural reforms in all countries, either with a positive or negative balance of payments, should play a bigger role," he said, adding that spillover effects of unconventional monetary policy, conducted by central banks in some countries, should be closely monitored.

The G20 put together a huge financial backstop to halt a market meltdown in 2009 but has failed to reach those heights since. At successive meetings, Germany has pressed the United States and others to do more to tackle their debts. Washington in turn has urged Berlin to do more to increase demand.

On currencies, the G20 text reiterated its commitment last November, to move towards "exchange rate flexibility to reflect underlying fundamentals and avoid persistent exchange rate misalignments".

"The G7 made a very clear statement this week. I think you'll see the G20 echo what was said, and say that currencies should not be used as a tool of competitive devaluation," Britain's finance minister, George Osborne, said in Moscow.

"Countries shouldn't make the mistake of the past of using currencies as a tool of economic warfare."

(Additional reporting by Randall Palmer, Lesley Wroughton, Tetsushi Kajimoto, Jan Strupczewski, Lidia Kelly and Jason Bush. Writing by Douglas Busvine. Editing by Timothy Heritage/Mike Peacock)

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Yen firms as G20 eyed, weak Europe dampens mood

LONDON (Reuters) - The yen firmed on Friday as investors braced for the likelihood of more conflicting comments on currencies from the G20 meeting, while a revival in worries about global economic growth weighed on shares and commodities.

The G20 forum in Moscow is in the spotlight as officials are expected to discuss whether the ultra loose monetary polices of the United States, Japan, Britain and the euro zone depart from the group's commitment to market-driven exchange rates.

The dollar shed 0.5 percent to 92.46 yen, dropping as far as a one-week low of 92.25 yen while the euro fell to a two-week low of 123.10 yen.

The Japanese currency gained some support when a Russian official said drafting the final communique from the G20 meeting was proving difficult, but the text would not single out Japan for criticism.

"There is an issue of 'who started the fire?' You can say that Japan has getting really aggressive but then they might say, well what have Americans done, what about the British and so on," said William De Vijlder, chief investment officer at BNP Paribas Investment Partners.

The yen was also underpinned by expectations that Japanese Prime Minister Shinzo Abe is close to selecting his nominee for Bank of Japan governor. A decision could come in the next few days, sources close to the process told Reuters [ID:nL4N0BF1LS]

Shares were broadly flat with the pan-European FTSEurofirst 300 index <.fteu3> little changed at 1,163.34 points following dismal gross domestic product data from across the euro zone on Thursday.

The surprisingly sharp contraction in the region's economy during the final three months of 2012 has undermined hopes of an early recovery from recession, but also boosted talk that the European Central Bank may have to ease policy further.

Frankfurt's DAX <.gdaxi>, Paris's CAC-40 <.fchi> and London's FTSE <.ftse> were around 0.1 to 0.3 percent lower.

The weaker demand outlook implied by the GDP data sent Brent crude under $118 a barrel and on course for its first weekly loss since mid-January.

Front-month Brent futures LCOc1 fell 30 cents to $117.70 a barrel, while Gold dropped to a six-week low of $1,629.89 an ounce, and was headed for its biggest weekly drop since December.

(Reporting by Richard Hubbard; editing by David Stamp)

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Asian shares gain on improving sentiment, G20 eyed

TOKYO (Reuters) - Asian shares rose on improving risk sentiment while the yen steadied ahead of the weekend meeting of G20 finance and central bank officials, whose views on global growth and differences over currencies will be scrutinized by investors.

"Asian markets have extended gains with risk sentiment remaining resilient as markets continue to push to new highs. Ahead of the European open, we are calling the major bourses relatively flat with GDP numbers in focus," Stan Shamu, market strategist at IG Markets, said in a note.

Financial spreadbetters were predicting London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> would open little changed ahead of European gross domestic data. U.S. stock futures were also steady, suggesting a similarly quiet Wall Street open. <.l><.eu><.n/>

The MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> extended gains, rising 0.6 percent as its materials sector <.mispjmt00pous> outperformed with a 1.6 percent increase partly on a jump in shares of top miners ahead of earnings news from Rio Tinto .

Australian shares rose 0.7 percent to their highest since September 2008, as a strong earnings season and receding fears about European and U.S. debt woes bolstered investor sentiment.

South Korean shares <.ks11> were flat after Wednesday's three-week closing high and biggest daily percentage gain since January 2 when investors cheered a pause in the yen's decline.

Market reaction was muted after monetary policy decisions from South Korea and Japan during Thursday's sessions.

The Bank of Korea held interest rates steady for a fourth straight month as expected, as global economies show signs of improvement and domestic inflation remains low. But the decision was not unanimous, its governor told a news conference.

The Bank of Japan also kept monetary policy steady and upgraded its economic assessment, as recent falls in the yen and signs of a pick-up in global growth give it some breathing space after expanding stimulus just a month ago.

A pause in the yen's rebound positively affected Japanese equities on Thursday, with the Nikkei average <.n225> advancing 0.7 percent after Wednesday's 1 percent slump when the firming yen prompted investors to take profits on exporters. <.t/>

"Usually the BOJ doing nothing causes a bit of disappointment, but since there are concerns about the flak Japan might get at the G20 this weekend for the weakening yen, standing pat will actually be a relief to the market," said Masayuki Doshida, senior market analyst at Rakuten Securities.

Markets in China and Taiwan remain shut for the Lunar New Year holiday but Hong Kong resumed trading on Thursday.

YEN IN SPOTLIGHT

The dollar recouped earlier losses to inch up 0.1 percent to 93.49 yen after marking its highest level since May 2010 of 94.465 on Monday. The euro steadied at 125.60 yen, below its peak since April 2010 of 127.71 yen touched last week.

The yen lost nearly 20 percent against the dollar between November and early February, and more than 20 percent against the euro.

The yen began its steady fall in mid-November as expectations built for a new government to take aggressive steps to bring Japan out of years of slump. Prime Minister Shinzo Abe is pushing for strong reflationary steps, pressuring the BOJ to take unprecedented expansionary measures.

The yen's rapid depreciation, after years of sharp appreciation, has drawn some criticism from overseas, with rhetoric heating up ahead of the Group of 20 nations meeting on Friday and Saturday in Moscow.

Russian Deputy Finance Minister Sergei Storchak told reporters on Wednesday in Moscow that the yen was "definitely overvalued" and that "there are no signs" that Japan's monetary authorities were intervening on the foreign exchanges.

Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo, said various interpretations this week over what the G20 may say about Japan's policy and a weak yen trend "have been used as an excuse to adjust positions ahead of the meeting, and I expect forex to be in ranges."

"Currency will be discussed but I think Russia wants the meeting to focus on broader economic issues involving emerging markets as it is the G20 gathering," he said.

Traders and analysts say 90-95 yen to the dollar appeared to be a comfortable range for now, unless upside surprises emerge in the U.S. economy or Japan quickly implements unexpectedly drastic reflationary policies, both of which will swing the dollar higher above the range.

They said the yen's upside was also capped around 87 yen, halfway between its slump from mid-November to early February.

Market reaction was muted to comments from Jack Lew, President Barack Obama's pick to run the Treasury Department, who on Wednesday said he would support a strong U.S. dollar, in line with longstanding U.S. policy.

Data published on Thursday showed Japan's economy shrank 0.1 percent in October-December from the previous quarter, falling for a third straight quarter.

U.S. crude was up 0.1 percent to $97.13 a barrel and Brent added 0.1 percent to $117.98.

London copper rose 0.2 percent to $8,240.50 a metric ton (1.1023 tons).

Gold regained some strength as recent losses attracted buying interest from Asian jewellers after the Lunar New Year break, but firmer equities could limit gains.

(Additional reporting by Joyce Lee in Seoul and Tomo Uetake in Tokyo; Editing by Eric Meijer and Richard Borsuk)

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Dollar, euro ease against yen on G7 policy doubts

LONDON (Reuters) - The yen rose against the dollar and the euro on Wednesday as investors reconsidered a G7 statement on exchange rates aimed at soothing concerns of a currency war but instead provoked a fresh bout of volatility.

The G7 reaffirmed its commitment to market-determined exchange rates and said that fiscal and monetary policies must not be directed at devaluing currencies in its statement which was interpreted as condoning the recent weakness in the yen.

However, an official from the group later said Tuesday's statement was meant to signal concerns about excessive yen moves, prompting a vicious reversal in the currency.

"It appears there is a lack of consensus at the G7 level in tackling the unintended weakening of currencies, due to the adoption of expansionary domestic monetary policies," analysts at Barclays said in a note clients.

In early European trading the dollar and the euro had both fallen by 0.3 percent against the yen to 93.20 yen and 125.42 yen respectively.

At the center of the debate is Japan, where Prime Minister Shinzo Abe's government has made it clear that it will push for aggressive policies to beat deflation through drastic monetary expansion. Anticipation of a bolder Bank of Japan policy has sent the yen down nearly 20 percent against the dollar since November.

Dealers said the market was likely to trade cautiously ahead of the outcome of a Bank of Japan meeting ending on Thursday and before a meeting of the Group of 20 finance ministers and central bankers in Moscow on Friday and Saturday.

Markets are also awaiting the Bank of England's quarterly inflation report which should show whether there's any realistic chance of further asset purchases in coming months which would add to pressure on sterling.

The euro zone will publish industrial production data for December at 1000 GMT, seen as likely to confirm that output in final quarter was very weak.

The data comes out a day ahead of flash estimates of fourth quarter GDP for the whole euro area which is forecast to show growth contracted by around 0.4 percent in the final three months of the year - the steepest quarter-on-quarter decline since the first quarter of 2009.

Ahead of the data Europe's share markets were little changed with the FTSE Eurofirst 300 index <.fteu3> of top companies opening flat but near the top of a six-day trading range, with the focus on corporate earnings reports.

London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> were between 0.1 percent higher and 0.2 percent down.

Debt markets were also little changed as investors await the results of an auction of long-term Italian debt which is seen as a test of demand before elections later this month.

Italian debt has been under pressure in recent weeks as a comeback in the opinion polls by former Prime Minister Silvio Berlusconi's party has raised the prospect of a fragmented parliament that could hamper the next government's reform efforts.

Germany also plans to sell 5 billion euros of two-year bonds.

(Editing by Anna Willard)

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Finger-pointing trumps problem-solving on budget

WASHINGTON (AP) — Just about everyone in official Washington is in agreement that big across-the-board spending cuts at the Pentagon and throughout domestic federal programs on March 1 are a bad idea.

So far, however, the warring tribes in the nation's capital seem more interested in finger-pointing than problem-solving.

Top House Republicans have embarked on a PR campaign reminding the public that the idea for the across-the-board cuts originated in Obama's White House.

Senate Democrats are preparing a bill to substitute about $120 billion in alternative deficit cuts over 10 years and prevent the automatic cuts — in Washington parlance, a sequester — through the end of calendar 2013. Its biggest component is a $47 billion tax increase on the rich; that is sure to prompt a GOP filibuster, probably successful, that will give Democrats political cover — and ammo.

"We again find ourselves in sad and familiar territory," said Senate Minority Leader Mitch McConnell, R-Ky. "Democrats sit on their hands until the last minute. Then they offer some gimmicky bill designed to fail."

Then there's President Barack Obama. He appeared before reporters at the White House last week to urge lawmakers to come up with a short-term plan to avoid the sequester. But Obama offered nothing specific, even though there are plenty of options at the ready after several recent rounds of failed Washington budget negotiations.

House Republicans do not have a plan to shut off the cuts and instead point to a spending cut bill that passed twice last year, most recently by a slender 215-209 vote in December. The GOP now controls eight fewer seats in the House and there's hardening sentiment among some tea party Republicans to allow the automatic cuts to take effect. It's not clear whether GOP leaders like Speaker John Boehner of Ohio could muster enough support to stop them.

The Senate bill would replace the automatic spending cuts with a tax increase patterned after the so-called Buffett Rule, which would require people with million-dollar incomes to pay a minimum 30 percent income tax. The rule is named after billionaire Warren Buffett, who championed it on the grounds that it wasn't fair for his secretary to pay a higher effective tax rate than him. That's because taxes on most earned or wage income are generally higher than taxes on investments.

The Buffett rule was a wedge issue in last year's campaign and was rejected by Senate Republicans in April. It's sure to prompt Republicans to scuttle the upcoming Democratic bill in a filibuster vote expected to be held just days before the cuts take effect March 1.

Republicans say the moment calls for presidential leadership.

"The president warned of grave economic consequences if the sequester were to go into effect, but he didn't announce any specific plans for how he would address it," Boehner told reporters last week. "He didn't bother to actually outline how he would replace the sequester that he suggested and insisted upon."

Senior White House aide Jason Furman said last week that any short-term plan should include "a balanced combination of spending and revenue measures." He would not elaborate. Nor have Obama and Boehner talked recently, other than pleasantries at the inauguration. Boehner and Senate Majority Leader Harry Reid, D-Nev., haven't been in touch either, even as the cuts loom ever closer.

The idea for the sequester came from the White House during negotiations in the summer of 2011 to increase the government's borrowing cap. Then, the White House pushed it as a way to avoid a second vote to increase debt limit that would have occurred in the middle of Obama's re-election campaign.

Whatever their reservations, top Republicans voted for the idea.

The sequester was intended to be so harsh that its prospect would drive a deficit-cutting "supercommittee" created by those talks toward an agreement. It did not.

The cuts were originally due to hit Jan. 1 but lawmakers gave themselves a two-month reprieve in last month's deal to avert the so-called fiscal cliff.

Many Republicans see the prospect of the sequester as their best chance to force Obama to agree to cuts in government benefit programs like Medicare, and some tea party Republicans are willing to absorb the sequester cuts if he won't go along. GOP leaders across the board say they won't agree to tax increases demanded by Democrats as part of any solution.

Obama carries the power of his office and the fact that he's more popular with the public than Capitol Hill Republicans into the battle. So Republicans already have been working overtime to remind voters that the sequester idea came from Obama's administration. Still, blaming the president for something some GOP members are embracing promises to be a tightrope exercise for Republican leaders.

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Euro edges up, shares and oil slide in choppy trade

LONDON (Reuters) - The euro edged up from a two-week low, while oil and European equities slipped from multi-month highs on Monday, with markets checked by ongoing worries over the euro zone, offsetting signs of a pickup in world trade.

Trading is expected to be light and choppy in the absence of any major economic drivers, a looming meeting of euro area finance ministers and the Lunar New Year holiday shutting most Asian financial centers.

The euro briefly touched a two-week low of $1.3325 in Asian trade, extending a sell-off that saw the common currency shed about 2.5 percent last week, but it has since steadied to be little changed around at around $1.3370.

Analysts were not expecting much new from a euro zone finance ministers meeting later in the day, though markets will be on watch for any discussion on the strength of the euro ahead of the G20 meeting at the end of the week.

Since hitting a 15-month high of $1.3711 on February 1, sentiment towards the euro has shifted after European Central Bank president Mario Draghi suggested any further strength could result in an interest rate cut. Nervousness over political developments in Spain and Italy has also unsettled the currency.

"The euro has stabilized at lower levels following last week's verbal intervention from ECB President Draghi, which was a subtle attempt to dampen the pace of euro appreciation in the near term," said Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ.

The pan-European FTSEurofirst 300 index <.fteu3> traded down 0.3 percent at 1,157.97 points in early trade, having added 1.2 percent on Friday on data showing a narrowing trade deficit in the United States and growing demand for Chinese exports, which bolstered hopes the global economy would strengthen.

Brent crude prices dipped slightly but remain not far from the nine-month high of just over $119 per barrel hit on Friday as the Chinese trade data revealed a big jump in oil imports.

Brent crude had dipped 40 cents to $118.50 per barrel, having peaked at $119.17 on Friday, the highest since May. U.S. crude futures fell 126 cents to $95.46.

Oil markets could get some support from stormy weather in the heavily populated U.S. Northeast, where a blizzard dumped up to 40 inches (1 meter) of snow with hurricane force winds, leaving hundreds of thousands of people without power.

(Reporting by Richard Hubbard; Editing by Will Waterman)

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Stocks end higher for sixth straight week, tech leads

NEW YORK (Reuters) - The Nasdaq composite stock index closed at a 12-year high and the S&P 500 index at a five-year high, boosted by gains in technology shares and stronger overseas trade figures.

The S&P 500 also posted a sixth straight week of gains for the first time since August.

The technology sector led the day's gains, with the S&P 500 technology index <.splrct> up 1.0 percent. Gains in professional network platform LinkedIn Corp and AOL Inc after they reported quarterly results helped the sector.

Shares of LinkedIn jumped 21.3 percent to $150.48 after the social networking site announced strong quarterly profits and gave a bullish forecast for the year.

AOL Inc shares rose 7.4 percent to $33.72 after the online company reported higher quarterly profit, boosted by a 13 percent rise in advertising sales.

Data showed Chinese exports grew more than expected, a positive sign for the global economy. The U.S. trade deficit narrowed in December, suggesting the U.S. economy likely grew in the fourth quarter instead of contracting slightly as originally reported by the U.S. government.

"That may have sent a ray of optimism," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.

Trading volume on Friday was below average for the week as a blizzard swept into the northeastern United States.

The U.S. stock market has posted strong gains since the start of the year, with the S&P 500 up 6.4 percent since December 31. The advance has slowed in recent days, with fourth-quarter earnings winding down and few incentives to continue the rally on the horizon.

"I think we're in the middle of a trading range and I'd put plus or minus 5.0 percent around it. Fundamental factors are best described as neutral," Dickson said.

The Dow Jones industrial average <.dji> ended up 48.92 points, or 0.35 percent, at 13,992.97. The Standard & Poor's 500 Index <.spx> was up 8.54 points, or 0.57 percent, at 1,517.93. The Nasdaq Composite Index <.ixic> was up 28.74 points, or 0.91 percent, at 3,193.87, its highest closing level since November 2000.

For the week, the Dow was down 0.1 percent, the S&P 500 was up 0.3 percent and the Nasdaq up 0.5 percent.

Shares of Dell closed at $13.63, up 0.7 percent, after briefly trading above a buyout offering price of $13.65 during the session.

Dell's largest independent shareholder, Southeastern Asset Management, said it plans to oppose the buyout of the personal computer maker, setting up a battle for founder Michael Dell.

Signs of economic strength overseas buoyed sentiment on Wall Street. Chinese exports grew more than expected in January, while imports climbed 28.8 percent, highlighting robust domestic demand. German data showed a 2012 surplus that was the nation's second highest in more than 60 years, an indication of the underlying strength of Europe's biggest economy.

Separately, U.S. economic data showed the trade deficit shrank in December to $38.5 billion, its narrowest in nearly three years, indicating the economy did much better in the fourth quarter than initially estimated.

Earnings have mostly come in stronger than expected since the start of the reporting period. Fourth-quarter earnings for S&P 500 companies now are estimated up 5.2 percent versus a year ago, according to Thomson Reuters data. That contrasts with a 1.9 percent growth forecast at the start of the earnings season.

Molina Healthcare Inc surged 10.4 percent to $31.88 as the biggest boost to the index after posting fourth-quarter earnings.

The CBOE Volatility index <.vix>, Wall Street's so-called fear gauge, was down 3.6 percent at 13.02. The gauge, a key measure of market expectations of short-term volatility, generally moves inversely to the S&P 500.

"I'm watching the 14 level closely" on the CBOE Volatility index, said Bryan Sapp, senior trading analyst at Schaeffer's Investment Research. "The break below it at the beginning of the year signaled the sharp rally in January, and a rally back above it could be a sign to exercise some caution."

Volume was roughly 5.6 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.

Advancers outpaced decliners on the NYSE by nearly 2 to 1 and on the Nasdaq by almost 5 to 3.

(Additional reporting by Angela Moon; Editing by Bernadette Baum, Nick Zieminski, Kenneth Barry and Andrew Hay)

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Stocks end higher for sixth straight week, tech leads

NEW YORK (Reuters) - The Nasdaq composite stock index closed at a 12-year high and the S&P 500 index at a five-year high, boosted by gains in technology shares and stronger overseas trade figures.

The S&P 500 also posted a sixth straight week of gains for the first time since August.

The technology sector led the day's gains, with the S&P 500 technology index <.splrct> up 1.0 percent. Gains in professional network platform LinkedIn Corp and AOL Inc after they reported quarterly results helped the sector.

Shares of LinkedIn jumped 21.3 percent to $150.48 after the social networking site announced strong quarterly profits and gave a bullish forecast for the year.

AOL Inc shares rose 7.4 percent to $33.72 after the online company reported higher quarterly profit, boosted by a 13 percent rise in advertising sales.

Data showed Chinese exports grew more than expected, a positive sign for the global economy. The U.S. trade deficit narrowed in December, suggesting the U.S. economy likely grew in the fourth quarter instead of contracting slightly as originally reported by the U.S. government.

"That may have sent a ray of optimism," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.

Trading volume on Friday was below average for the week as a blizzard swept into the northeastern United States.

The U.S. stock market has posted strong gains since the start of the year, with the S&P 500 up 6.4 percent since December 31. The advance has slowed in recent days, with fourth-quarter earnings winding down and few incentives to continue the rally on the horizon.

"I think we're in the middle of a trading range and I'd put plus or minus 5.0 percent around it. Fundamental factors are best described as neutral," Dickson said.

The Dow Jones industrial average <.dji> ended up 48.92 points, or 0.35 percent, at 13,992.97. The Standard & Poor's 500 Index <.spx> was up 8.54 points, or 0.57 percent, at 1,517.93. The Nasdaq Composite Index <.ixic> was up 28.74 points, or 0.91 percent, at 3,193.87, its highest closing level since November 2000.

For the week, the Dow was down 0.1 percent, the S&P 500 was up 0.3 percent and the Nasdaq up 0.5 percent.

Shares of Dell closed at $13.63, up 0.7 percent, after briefly trading above a buyout offering price of $13.65 during the session.

Dell's largest independent shareholder, Southeastern Asset Management, said it plans to oppose the buyout of the personal computer maker, setting up a battle for founder Michael Dell.

Signs of economic strength overseas buoyed sentiment on Wall Street. Chinese exports grew more than expected in January, while imports climbed 28.8 percent, highlighting robust domestic demand. German data showed a 2012 surplus that was the nation's second highest in more than 60 years, an indication of the underlying strength of Europe's biggest economy.

Separately, U.S. economic data showed the trade deficit shrank in December to $38.5 billion, its narrowest in nearly three years, indicating the economy did much better in the fourth quarter than initially estimated.

Earnings have mostly come in stronger than expected since the start of the reporting period. Fourth-quarter earnings for S&P 500 companies now are estimated up 5.2 percent versus a year ago, according to Thomson Reuters data. That contrasts with a 1.9 percent growth forecast at the start of the earnings season.

Molina Healthcare Inc surged 10.4 percent to $31.88 as the biggest boost to the index after posting fourth-quarter earnings.

The CBOE Volatility index <.vix>, Wall Street's so-called fear gauge, was down 3.6 percent at 13.02. The gauge, a key measure of market expectations of short-term volatility, generally moves inversely to the S&P 500.

"I'm watching the 14 level closely" on the CBOE Volatility index, said Bryan Sapp, senior trading analyst at Schaeffer's Investment Research. "The break below it at the beginning of the year signaled the sharp rally in January, and a rally back above it could be a sign to exercise some caution."

Volume was roughly 5.6 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.

Advancers outpaced decliners on the NYSE by nearly 2 to 1 and on the Nasdaq by almost 5 to 3.

(Additional reporting by Angela Moon; Editing by Bernadette Baum, Nick Zieminski, Kenneth Barry and Andrew Hay)

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