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Europe: Shares pare losses as yields and euro ease on US data

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[LONDON] European shares closed off their daily lows on Thursday as a rally in the euro and a sell-off in bonds paused, helped by some better-than-expected US unemployment benefit claims data.

The figures pointed to US labour market resilience ahead of unemployment numbers on Friday, which lured buyers back into the dollar, pushing down the euro and aiding euro zone shares and government bonds.

The FTSEurofirst 300 closed down 0.9 per cent at 1,557.25 points, having earlier touched its lowest since May 7.

The European Central Bank's insistence on Wednesday that there was no need to adjust monetary policy in the face of volatility had caused a spike in the euro and bond yields and raised fears for firms' borrowing costs and export prospects. "The pick-up in the bond yields is putting pressure on the European stock markets," said Mirabaud Securities' senior equity sales trader John Plassard.

The FTSE 300 rallied nearly 25 per cent between mid-January and mid-April following the ECB's announcement it would buy bonds to stimulate inflation and growth. That knocked the euro and lowered borrowing costs for European governments and firms, and boosted equities' attraction by lowering returns on bonds.

But in the past month the index has been at its most volatile since 2012, based on the size of the moves between its open, high, low and close.

Utilities, which had been seen as a natural replacement for bond investments due to their reliable dividend and higher yield versus bonds, were hit hardest, falling 2.2 per cent.

Greece's benchmark ATG equity index closed 1.3 per cent lower, giving back some recent gains, as crunch talks on an aid-for-reforms deal continued.

Greece's EU/IMF lenders have asked Athens to commit to selling off state assets, implement pension cuts and maintain unpopular labour reforms, sources familiar with their proposal said on Thursday. Such demands would cross the government's so-called red lines.

Greek Prime Minister Alexis Tsipras will brief parliament on Friday, a government official said on Thursday. "Clearly there remains some way to go in the talks so I refuse to get too optimistic. The messages coming from the talks are extremely mixed and even the creditors can't agree on a consistent stance," said OANDA senior market analyst Craig Erlam.

Swiss agrochemicals group Syngenta outperformed to rise 1.2 per cent after Reuters reported that German company BASF was considering a bid.

Corporate takeover activity has provided a cushion for European stock markets this year.

Some investors also rising yields, a reflection of inflation expectations, as a sign the euro zone economy is recovering, which would be favourable for stocks.

JP Morgan Asset Management research shows a historically positive correlation between rising bond yields and positive equity returns when rates are moving up from a low base. "Equities represent the best value and should continue to offer an attractive and growing income when compared to bonds, even if bond yields start to rise," said Stephen Thornber, manager of the St. James's Place strategic managed fund.

REUTERS