European shares inched towards a two-year high on Monday, as a political attempt to break a budget impasse in the United States and expectations of aggressive Japanese stimulus bolstered the appetite for shares.
U.S. House Republican leaders said on Friday they would seek to pass a three-month extension of federal borrowing authority in the coming days to buy time for the Democrat-controlled Senate to pass a plan to shrink budget deficits.
European shares were supported by the news, but with no clear response from the Democrats and a thin session expected due to a market holiday in the United States, the impact on assets such as bonds and commodities was limited.
London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were up 0.4 to 0.6%, leaving the pan-European FTSEurofirst 300 within touching distance of a two-year high and MSCI's world index steady at a 20-month high.
Expectations that the Bank of Japan will deliver a bold monetary easing plan at the end of its two-day meeting on Tuesday also supported shares and created choppy conditions in the currency market.
According to sources familiar with the BoJ's thinking, the government of new Prime Minister Shinzo Abe and the central bank have agreed to set 2% inflation as a new target, supplanting a softer 1% 'goal'.
The yen, which has fallen 13% against the dollar over the last two months as the shift in Japanese policy has taken shape, touched a new 2-1/2 year low in early trading but then firmed as traders cut short positions given the BOJ has often fallen short of market expectations.
The slump in the yen prompted Russia's deputy central bank governor to warn of a new round of 'currency wars' and the medium-term risk of running ultra-loose monetary policies is likely to be a theme of the World Economic Forum in Davos, which opens on Wednesday.
Market pressure on Europe is now less intense thanks to the European Central Bank's promise to prevent a collapse of the euro. Policymakers are set to discuss Cyprus's plight and plans for the euro zone's bailout fund to directly recapitalise banks.
French Finance Minister Pierre Moscovici said as he arrived at the Brussels meeting that a proper recapitalisation strategy was very important.
One of the key factors that drove two-year German yields higher last week was also the prospect of sizeable early repayments of the 1 trln euros euro zone banks took from the ECB roughly a year ago.
The central bank will publish on Friday how much banks plan to return at the optional first repayment date on January 30.
German markets showed no reaction after the centre-left opposition party edged Chancellor Angela Merkel's conservatives from power in a regional election on Sunday, reviving its flagging hopes for September's national election.
The Bundesbank's latest report delivered an upbeat message on the country's economy, saying a recent slump should be short-lived and may have already bottomed out.
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