European stocks steady; await Greek deal

By Richard Hubbard

LONDON (Reuters) - European stocks and the euro steadied on Thursday as investors awaited news of a Greek bailout deal and looked to the European Central Bank for a steer on policy moves that could support the recent appetite for riskier assets.

U.S. stocks were also poised for a lower start with the focus on the weekly initial jobless claims number in the light of last week's strong nonfarm payrolls report.

Decisions by the ECB and the Bank of England to leave key interest rates unchanged were widely expected.

"All eyes will be on Greece and the role of the ECB," ING economist Carsten Brzeski said.

ECB President Mario Draghi will explain the bank's rate decision at a 1330 GMT news conference where he is expected to face a grilling on whether it might lower rates next month and what it can do to help Greece.

"The main thing to look for is any indication of a cut next month, which we expect, and whether Draghi confirms recent reports that the ECB will be contributing to a reduction in Greek debt," said Michael Sneyd, FX strategist at BNP Paribas.

The UK central bank's move to inject 50 billion pounds more into the UK economy, in a policy known as quantitative easing (QE), also had little impact.

"The outlook is still highly uncertain, This new round of QE should help support confidence, though the direct stimulus to near-term growth is likely to be limited," said Ian McCafferty, chief economic adviser to the Confederation of British Industry.

The markets are much more focused on the deal to agree a second Greece bailout, and remain optimistic it will be reached at a meeting of euro zone finance ministers later today.

"Certainly, that (an agreement) would be risk positive and there still would be a knee-jerk reaction," said Peter Chatwell, rate strategist at Credit Agricole in London.

The euro was up 0.1 percent at $1.3268 against the dollar, having earlier hit a high of $1.3313, its strongest since mid-December.

Analysts expect the euro could push higher in the short-term despite persistent worries about unsustainable debt levels in some euro zone countries.

"Once we get beyond the ECB meeting I wouldn't be surprised to see a further move higher in euro/dollar," said Niels Christensen, currency strategist at Nordea in Copenhagen.

The pan-European FTSEurofirst 300 index of top shares was initially held back by disappointing results from Dutch bank and insurance group ING and Credit Suisse , but soon resumed its rise to six-month highs, gaining 0.3 percent higher at 1074.70.

The MSCI All Country World Index (ACWI), which tracks shares in 45 countries, is up 9.3 percent for the year to date was unchanged at 327.27.

However, a jump in Spanish bond yields, after the government surprised markets by selling an extra 4 billion euros of 10-year bonds on Wednesday, rattled markets and highlighted the fragility of the sentiment behind the recent rally in risk assets.

The jump in Spanish debt yields spread to the Italian debt market and saw prices for safe-haven German government bonds also erase some of their early losses. The March Bund future, which had been down as much as 23 ticks, recovered to be virtually unchanged at 137.82.

Markets have been in optimistic form since the European Central Bank flooded banks with almost half a trillion euros in cheap loans in late December.

The next ECB tender, which is expected to be nearly as big as that in December, will represent a rapid expansion in the ECB's balance sheet as it battles to help resolve the euro zone debt crisis, which itself could worry the markets.

"I suspect this risk rally may have a little further to run - until people realise that the expansion of the ECB's balance sheet is not a positive and the debt dynamics of Greece are not sustainable," said CIBC's Jeremy Stretch.

Commodities markets were firmer on expectations that a Greek debt deal would emerge soon, while concerns about cold weather in Europe and Middle East disruption added support to oil prices.

Brent crude oil futures for March were up 42 cents to $117.62 a barrel, after reaching an intra-day high of $118.17 a barrel and U.S. crude added 67 cents to reach $99.38 a barrel in its third day of increases.

Earlier news that China saw a faster-than-expected annual inflation rate of 4.5 percent in January, above a 4.1 percent rise forecast, had a muted impact on markets.

The outcome dampened expectations of an imminent move by the central bank to cut banks' required reserve ratios (RRR), the level of cash they must hold in reserve.

(Additional reporting by Jessica Mortimer and Sakari Suoninen. Editing by Anna Willard and Patrick Graham)