ECB QE question marks cool three-day stocks rally

LONDON (Reuters) - A three-day rally in world share markets started to peter out on Friday as worries emerged that the European Central Bank's money printing plans could come with a number of restrictive strings attached.

Officials speaking to Reuters on condition of anonymity said the ECB may require countries such as Greece or Portugal to set aside extra money or provisions to cover potential losses from any bond-buying it embarks on next year.

Concern that this could dilute the potency of any action put European stocks <.FTEU3> in reverse, though U.S. markets opened 0.2 percent higher after their best run since late 2011 over the last two days.

"Markets have pretty much fully priced in QE for Q1 next year, so if there's anything that looks like throwing a spanner in the works, markets have to take that into account," said Lorcan Roche Kelly, an analyst at Agenda Research in Ireland.

"That can't happen in a monetary union. Either you have a single policy for a monetary union or you don't."

Markets overall though were ending their final full week of trade in 2014 on a high. Wall Street's momentum, hopes that Russia was stabilizing and a recommitment from Japan to its massive stimulus campaign saw Asian stocks enjoy their best day in 15 months.

Brent oil prices also rose back above $60 a barrel, recovering from near a 5-1/2-year low as investors squared books ahead of the year-end break after a six-month slide. [O/R]

That helped the equally hard-hit Russian rouble claw back another 3.5 percent of the roughly 45 percent it has lost since the middle of the year.

At one stage this week it was down about 20 percent against the dollar despite a massive hike in Russian interest rates, putting at risk the stability on which President Vladimir Putin has built his popularity.

"I think Russia still bears watching over Christmas because oil has not bottomed out. A dip in Brent prices below 60 dollars means that financial stability and economic stability is still at risk," said Phyllis Papadavid, a currency strategist with BNP Paribas in London.

The IMF also said on Friday it had "held productive technical discussions" with Ukraine's new government and would return in January, but gave little hint of whether the extra funding that the country badly needs would be forthcoming.

TO QE OR NOT TO QE

Ahead of the start of trading on Wall Street traders there were facing up to the headache of what is known as "quadruple witching," the expiration of stock options, index options, index futures and single-stock futures.

On Thursday they had still been celebrating the Fed's pledge to be patient in raising rates, with the S&P 500 making the biggest daily gain since January 2013 and notching a 4.5 percent jump in two sessions.

In currency market, the euro fell towards recent 28-month lows against the dollar and the yen was also on the back foot at 119.26, with the prospect of ECB bond buying driving the former and Japan's ongoing stimulus the latter. [FRX/]

In tune with the global rise in risk appetite, high-flying Chinese stocks hit a new four-year peak earlier. Japan's Nikkei climbed 2.0 percent to erase most of its recent losses. Emerging market stocks <.MSCIEF> were on course for their first weekly gain this month.

It was a similar story among euro zone periphery bond yields, which fell on Friday, with Spain's hitting record lows and Italian yields hanging close to theirs. [GVD/EUR]

"It may be a watered-down form of (ECB) QE, but from a markets perspective, we would rather have an imperfect QE now than perfect QE much later," said Richard McGuire, senior fixed income strategist at Rabobank.

With the ECB set to ease and the Fed looking to tighten, bond yields have moved in favor of the dollar. The premium two-year Treasuries pay over bunds has grown to 71 basis points, the widest since early 2007.

Yields on U.S. 10-year bonds were at 2.20 percent in early U.S. trading from as low as 2.00 percent early in the week.

"In the U.S. they are going to be patient (about raising interest rates) and in Europe they are going to be patient for even longer," KBC strategist Pier Lammens said. "We bet on a continuation of the post-FOMC 'risk on' rally."

(Additional reporting by Marius Zaharia and Jamie McGeever in London; Editing by Hugh Lawson and Crispian Balmer)

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