European stocks up on German growth prospects

Hopes that German growth and new European Union measures will help ease the debt crisis boosted European stocks on Friday, though Asia remained shaken by fears that China will have to take action to cool off its economy.

Another rise in Germany business confidence, as measured by the Ifo Institute's monthly survey, suggested the country will continue to power Europe's economy as it enjoys strong exports and sees domestic spending picking up.

Expectations that EU officials are preparing a new, more comprehensive, approach to the debt crisis also helped European stocks this week. Governments are debating giving their euro750 billion ($1 trillion) bailout fund broader powers, such as the ability to buy bonds on the market, which would help ease the pressure on fiscally weak countries like Portugal and Spain.

The improvement in market sentiment has helped the euro make sharp gains, particularly against the dollar — it traded at $1.3530 from $1.3472 late Thursday in New York.

"Are currency markets looking beyond last year's story of European peripheral sovereign contagion? The answer appears a tentative 'yes,'" analysts at Credit Agricole CIB wrote in a note to investors.

They expect the euro to hit $1.37 by the end of March but expect plenty of volatility and warn that EU plans to bolster their bailout fund may take longer than expected, hurting market confidence once again.

Meanwhile, stocks continued to edge higher. Britain's FTSE 100 was up 0.6 percent to 5,903.39. Germany's DAX rose 0.4 percent to 7,049.98 and the CAC-40 in Paris was up 0.8 percent to 3,996.18.

Wall Street was set for a more muted open ahead of more earnings reports. Dow futures were off 0.1 percent at 11,764 and broader S&P futures gained less than 0.1 percent to 1,276.

Bank of America Corp. and General Electric, among others, were scheduled to report earnings figures.

In Asia, stocks were still shaken by the previous day's news that China's economy grew by 9.8 percent in the fourth quarter and that inflation remained stubbornly high. The numbers triggered worries that the world's second-largest economy — and the main driver of global economic growth in recent years — would force itself to slow down to control prices by raising bank interest rates or reserve requirements.

Chinese inflation has become "a key issue for global markets," according to a report by Bank of America Merrill Lynch Global Research.

"Manufactured export prices are rising again, as domestic costs — especially unskilled wages — are passed down the supply chain," the report said. "China's competitiveness is adjusting through cost and wage inflation, rather than currency appreciation."

Sean Darby, chief Asia strategist at Nomura International in Hong Kong, said wages were also being driven up by shortages of skilled labor — increasingly in demand as China and other developing nations cater to domestic demand as well as export markets with more sophisticated products.

Markets would be "reasonably cool" early in 2011, Darby said. "People's attention is going to be on the front-loading of rate hikes" by central banks in China and elsewhere.

Japan's Nikkei 225 stock average lost 1.6 percent to close at 10,274.52. Trading houses, metals producers and miners declined. Major trading firm Mitsubishi Corp. tumbled 4.5 percent and rival Mitsui & Co. lost 3.2 percent.

Australia's S&P/ASX 200 dropped 0.6 percent, while Hong Kong's Hang Seng fell 0.5 percent, South Korea's Kospi shed 1.7 percent and Singapore's index declined by 0.6 percent.

Chinese shares — which took a beating Thursday — bucked the trend, with the benchmark Shanghai Composite up 1.4 percent to 2,715.29. The Shenzhen Composite Index for China's smaller, second market rose 0.7 percent to 1,178.16. New Zealand shares also rose.

Notable gainers included Japan's NEC Corp., which jumped 2.1 percent in Tokyo. The buying was triggered by local media reports that the company is nearing a deal with China's Lenovo Group Ltd. to form a PC joint venture. NEC said in a statement no decisions had been made. It also declined to comment on whether the two companies are in talks.

In currencies, the dollar dropped to 82.89 yen from 82.98 yen late Thursday.

Benchmark crude for March delivery was up 10 cents to $89.69 a barrel in electronic trading on the New York Mercantile Exchange. The contract lost $2.22 to settle at $89.59 on Thursday.


Pamela Sampson in Bangkok contributed to this report.