December 11, 2012 / 3:52 AM / in 5 years

German confidence lifts Europe shares to 18-month high

A city trader monitors stock prices in London.

LONDON (Reuters) - European shares hit an 18-month high and the euro climbed on Tuesday, buoyed by a pick-up in German confidence indicators and expectations the Federal Reserve will keep pumping money into the U.S. economy.

Wall Street shares were likely to crawl higher too, with futures prices pointing to a 0.22 rise in the S&P 500 and 0.26 percent and 0.30 gains in the Dow Jones and Nasdaq 100.

Following some disappointing euro zone data this month, the ZEW survey provided some relief for markets, showing confidence among German investors and economists increased sharply this month.

Markets had been rattled on Monday by Italian Prime Minister Mario Monti’s announcement he would step down some weeks early. But the upbeat ZEW data helped lift shares and the euro from their gloom.

The pan-European FTSEurofirst 300 share index .FTEU3 rose to 1137.90 points, its highest since June 2011, though it later eased back a little. Italian bonds shrugged off their early morning weakness and the euro jumped to four-day high of $1.29970.

Many economists expect the German economy to contract in the fourth quarter under the weight of the euro zone’s troubles, but leading indicators like the ZEW and a separate survey from the Ifo institute now suggest it could bounce back in early 2013.

“The (ZEW) rise confirms earlier worldwide survey results signaling that the global industrial cycle has turned and that world trade is picking up,” said Aline Schuiling a senior economist at ABN Amro.

FED FOCUS

The other main focus for investors was a meeting of the Federal Reserve, and ongoing “fiscal cliff” talks in the U.S. to avoid $600 billion of previously drawn up spending cuts and tax hikes suddenly kicking in the new year.

When the Fed concludes its two-day meeting on Wednesday, the central bank is expected to extend its asset purchase scheme and commit to buy $45 billion of U.S. debt each month.

“Since the October FOMC meeting, the majority of policymakers highlighted that the current policy accommodation is needed as the labor market has been too weak for too long,” said Annalisa Piazza, an economist at Newedge Strategy.

“Recent labor market reports have been relatively encouraging but - in our view - we need to see much more improvement before some sort of accommodation will be removed.”

Expectations of more easing put the dollar .DXY on the back foot .DXY and pushed the Canadian dollar to a two-month high of C$0.9873 per U.S. dollar, while the New Zealand dollar hit a nine-month high of $0.8369.

The euro was stronger against most major currencies as the afternoon session gathered pace. It had initially climbed after Italy’s Monti played down his decision to resign, saying he wanted to continue to influence politics whatever role he fills after a parliamentary election in the new year.

Bank of England Governor Mervyn King warned on Monday that continued imbalance in the global economy may see more competitive depreciation of currencies as countries resort to “actively managed exchange rates”, in place of domestic monetary policy priorities, as a way to encourage growth.

HOLDING PATTERN

In the oil market, Brent crude rose back above $108 a barrel as the dollar weakened and continued unrest in Egypt and Syria underscored the continuing tensions blighting the Middle East, the world’s major oil exporting region.

Gold was steady near $1,710 an ounce, with more U.S. stimulus expected to support gold’s appeal as a hedge against inflation.

Asian equities had earlier hit a 16-month high and the combined rises in Europe left the MSCI index of world stocks .MIWD00000PUS up 0.2 percent at 335.51 ahead of the U.S. open, its highest level in almost two months.

Still to come in macroeconomic data are U.S. international trade figures for October at 8:30 a.m. EDT followed by consumer confidence and wholesale inventory data at 10 a.m. EDT.

“We’ve been getting a lot of the beginning of our day from seeing what Europe has been doing and I think that’s going to hold true today,” said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

Additional reporting by Leah Schnurr in New York; Editing by Peter Graff and Alastair Macdonald

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