GLOBAL MARKETS-European shares top five-year highs as periphery rally continues

Reuters - UK Focus

* European shares hover at 5-yr high as euro zone gains

* Wall Street expected to start higher after results

* U.S. oil, gold rise, showing some optimistic on growth

* Dollar index pushes higher; Aussie remains under pressure

* Nickel heads for best week in almost a year

By Marc Jones

LONDON, Jan 17 (Reuters) - European shares reached a new5-1/2 year high on Friday as a third weekly gain on the spin forPortuguese and Spanish bonds fed improving sentiment in theregion's Mediterranean rim.

Disappointing results from some of Wall Street's big nameson Thursday had dampened investors' mood overnight but Europe'songoing recovery and hopes U.S. data later will paint a brighterpicture put a spring back in their step.

Future (Other OTC: FRNWF - news) 's prices pointed to gains of around 0.3 percent forthe major U.S. indexes when trading resumes in New York (Frankfurt: HX6.F - news) , whilethe dollar index, which tracks the greenback against abasket of six major currencies, was already pushing higher.

After another week of steady progress, European shares were on the up again as they climbed 0.5 percent.

London's FTSE, Paris's CAC 40 andFrankfurt's Dax all made gains and bourses in Portugal, Italy and Spain continued their redhot streak to leave the region heading for its fourth week ofgains in five.

"Investors are willing to take more risk and in theperiphery we have seen quite a lot of good developments," saidRabobank euro zone economist Emile Cardon.

"I think economic growth in most European countries willcontinue to rise ... Portugal saw a lot of demand when it wentto the capital markets and we have seen quite good progress inIreland (Other OTC: IRLD - news) , so most of these developments are supportive."

After a brief early breather, euro zone bond markets alsocontinued their rally as Portuguese and Spanish government bondsadded to a third week of strong gains.

Portuguese yields were nestled at 3-1/2 yearlows at just over 5 percent after Standard & Poor's removed theimmediate threat of a downgrade to Lisbon's rating on Friday.The country's borrowing costs are now down a full percentagepoint since the end of last year.

"It was not that long ago that we were almost certain thatPortugal would still need another programme," said MariusDaheim, chief strategist at Bayerische Landesbank.


Applying some pressure on the bond market rally was a thirdspike in as many months in overnight euro money market rates,which left them above the normal ceiling of the European CentralBank's main 0.25 percent borrowing rate.

The move up has been driven by a sharp drop in the amount ofspare cash sloshing around the euro zone banking system. Bankshave paid back almost half the 1 trillion euros the ECB pumped into markets at the height ofthe euro crisis.

Rising money market rates are one of the factors MarioDraghi has underlined as a potential trigger for the ECB to cutinterest rates again or take even more drastic action.

There were signs of self-regulation of their ECB borrowingby banks on Friday but it provided little respite for the euroas it struggled against the strong dollar.

Sterling, in contrast, surged half a percent to $1.6440after UK retail figures came in far stronger than forecast,wrongfooting many traders who have turned more bearish on thepound after its strong run over the last six-months.

"We were contemplating a test of support for the pound at$1.6320. In the end we got this stonking number which provoked agenuine reaction," said Daragh Maher, strategist with HSBC inLondon.


In Asian trading, share markets were subdued afterdisappointing earnings on Thursday from Wall Street giantsGoldman Sachs (NYSE: GS-PB - news) and Citigroup Inc (NYSE: C - news) had dampened themood.

Some of Thursday's gloom was cleared ahead of the WallStreet restart as global giant General Electric (Swiss: GE.SW - news) posted arise in profits, though costly legal bills hit bank MorganStanley (Shenzhen: 002588.SZ - news)

A batch of U.S. data due later will include December U.S.housing starts, building permits, industrial production and theUniversity of Michigan sentiment index, all of whichinvestors will be hoping will paint a brighter picture.

U.S. crude oil futures rose 0.5 percent to $94.50 abarrel, not far from a two-week peak of $94.64 reached earlierthis week after U.S. government data showed alarger-than-expected drop in inventories. They were set to posttheir first weekly gain in three weeks.

Gold was steady at $1,242 an ounce. However, it wasnickel that caught the eye: despite a dip on the day,Indonesia's recent ban on ore exports left the metal heading forits biggest weekly rise in almost a year.

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