* World stocks set for third straight quarterly rise
* Crude up 22 pct this qtr -- best performing major asset
* Yen hits 10-month low vs euro
By Dominic Lau
LONDON, March 31 (Reuters) - World stocks hit a three-week
high on Thursday and the euro firmed, but Portuguese government
bond yields hit fresh euro lifetime highs as the country missed
a budget target and its credit rating was downgraded again.
World stocks have now recovered all of the losses from a
sharp sell-off after disaster struck Japan earlier this month
and are heading for their third quarterly gain in a row thanks
largely to improving U.S. growth.
But the euro zone debt crisis intensified with news of
Portugal's troubles and ahead of the publication of Irish bank
stress tests.[][]
Portugal's budget deficit reached 8.6 percent of gross
domestic product in 2010, above a target of 7.3 percent agreed
with Brussels, statistics agency INE said on Thursday.
The yield premium that investors demand to hold Portuguese
rather than benchmark German bonds rose to 508 basis points, 12
bps wider on the day, as the country's 10-year yields
<PT10YT=TWEB> hit a fresh euro lifetime high of 8.476 percent.
Portugal's stocks <> lost 0.9 percent.
Despite the debt crisis, the European Central Bank has
continued to signal that it could raise its benchmark interest
rate next week to curb inflation, a message that has kept the
euro strong against other currencies.
The yen fell to a fresh 10-month low versus the euro and
touched a three-week trough against the dollar as expectations
grew that Japan would lag the euro zone and U.S. central banks
in raising interest rates. So far this year, the euro has risen
nearly 8 percent against the yen.
"Rate differentials are playing a big role, especially as
there is no probability for the BOJ to become more hawkish, even
in the medium to long-term." said Manuel Oliveri, currency
strategist at UBS in Zurich.
The euro was up 0.6 percent at 117.77 yen <EURJPY=> and the
dollar was steady at 82.83 yen <JPY=> after reaching 83.21 yen
earlier.
The European common currency was up 0.6 percent at $1.4219
<EUR=>, boosted by quarter-end and fiscal year-end flows,
traders said.
Europe's FTSEurofirst 300 <> share index fell 0.5
percent, while Irish shares <.ISEQ> rose 0.5 percent and yields
on Ireland's 10-year government bond <IE10YT=TWEB> remained
elevated above 10 percent.
The Irish Independent said Dublin's stress tests would show
an additional 20-25 billion euro hole in its banks capital --
broadly in line with expectations -- and will be followed by a
radical restructuring of the sector. []
A source familiar with the process said Ireland would merge
EBS building society into Allied Irish Bank <ALBK.I> as part the
overhaul []. Trading in Allied Irish Bank and Bank
of Ireland <BKIR.I> was suspended.
U.S. stock index futures <SPc1> <DJc1> <NDc1> were flat to
up 0.1 percent, indicating a steady start on Wall Street.
OIL TENSIONS
Brent crude <LCOc1> rose 1 percent above $116 a barrel and
were up 22.7 percent for January-March, on track to become the
best performing major asset in the first quarter of 2011 as
political unrest in the oil-rich Middle East and North Africa
ignited supply concerns.
Copper <CMCU3>, however, was down 2.5 percent this quarter.
Higher oil prices, seen as a tax on global growth, have not
yet knocked world equities off their stride. Global equities
measured by MSCI All-Country World Index <.MIWD00000PUS>
advanced 0.3 percent, on track for a 4.1 percent gain for
January-March -- the third straight quarterly rise.
MSCI emerging markets index <.MSCIEF> rose for the third
day, up 0.7 percent and were on track to gain 1.4 percent for
the first quarter, recovering losses from earlier this year when
investors shifted their money to developed market equities on
concerns over inflation in developing countries.
However, emerging market shares still underperformed
developed market equities, whose strong performance was mainly
driven by gains in U.S. stocks. The Dow Jones industrial average
<> is up 6.7 percent this quarter.
"While we remain comfortable with being overweight
financials, we see less need in making such hard distinctions
now given the improving background in China and the reduced
scope for economic surprise in the U.S. in the short term,"
Deutsche Bank said in a note.
"Increasingly we find ourselves looking for opportunities
across the cyclical stocks as whole, both global and domestic."
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Asset returns in Q1 2011 graphic: http://r.reuters.com/wur78r
Key events in Q1 2011 timeline: http://r.reuters.com/saj68r
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Japan's Nikkei average <> added 0.5 percent.
Japanese fund managers cut their global stock weighting to a
12-year low in March, while raising their bond weighting to an
all-time high as they reduced risk positions after the
earthquake, a Reuters survey showed. []
(Additional reporting by Neal Armstrong; Editing by Ruth
Pitchford)
