Selloff slows as timid loan take-up boosts bets on ECB QE

LONDON (Reuters) - A selloff in world stocks slowed on Thursday as oil prices steadied at a five-year low and lacklustre demand for virtually- free ECB money stoked expectations the bank will have to resort to full-blown quantitative easing.

Banks borrowed 130 billion euro of four-year loans from the European Central Bank, taking barely more than half of the total money that had been offered this year as the euro zone's economy continues to struggle.

Investors had seen it as a final throw of the dice before deciding, probably early next year, if it will put aside Germany's concerns and copy the approach of the U.S., Britain and Japan and start buying government bonds.

"The bottom line is that the disappointing TLTRO (loan) outcome has brought sovereign QE another step closer," said Nick Kounis, head of macro and financial markets research at ABN Amro.

"It now looks close to impossible for the ECB to achieve anywhere near a trillion euro balance sheet expansion with its existing measures."

European shares <.FTEU3> rose and the euro and government bond yields in the most of the 18-country bloc fell after the result, [ID:nL6N0TV1Z0] although the effects were quick to wear off as the cautious market mood returned.

Oil saw a 1 percent rise in Europe, but after another sharp drop on Wednesday and more evidence that Saudi Arabia, the world's top producer, is content to let the slump continue, Middle Eastern stock markets took another lurch lower.

Russia and the battered rouble was back in the firing line too, as a 100 basis point interest rate hike by the central bank failed to eliminate fears that the country is heading for a full-blown financial crisis.

The bank has now raised rates by a cumulative 500 basis points this year. That is despite a sharp slowdown in economic growth fuelled by worries about oil and Russia's deteriorating relations with the West over Ukraine.

"There is no way this won't be impacting the banks and the corporates," said UBS strategist Manik Narain. "They should send a much more determined signal that they will do whatever it takes, for as long as it takes."

DOLLAR DIPS, OIL STEADIES

Futures prices pointed to a small 0.2 percent rebound for Wall Street when trading resumes, but after its biggest fall since October on Wednesday and with trading volumes already thinning ahead of the year-end, dealers were subdued. [.N]

The dollar <.DXY> was also starting to backslide again in the currency market. It made small gains against the yen but as it waned against the euro it looked to be heading for a fourth straight day in the red. [FRX]

Despite the recent volatility displayed by the dollar, the divergence in U.S. monetary policy from Europe and Japan could continue to favour the greenback in the long term.

New Zealand's central bank governor said he expected to see more central bank money printing next year than both the last two years, despite the U.S. ending its efforts.

"There are question marks around Japan and certainly in Europe," Reserve Bank of New Zealand Governor Graeme Wheeler told a media briefing.

The prospect of ECB QE next year kept German bond yields pinned at record lows, while Greek bonds were also steadier, having been in a tailspin this week after the Greek prime minister decided to bring forward a presidential vote.

Battered oil prices had edged up towards $65 a barrel helped by the weaker U.S. dollar, although prices remained close to a five-year low on signs that already ample supply will be even more plentiful in 2015.

North Sea Brent crude rose 63 cents to $64.87, up from Wednesday's low of $63.56 - the weakest since July 2009. U.S. crude , which also hit a five-year low on Wednesday, rose 48 cents to $61.42.

Asian stocks had sagged overnight following on from Wall Street's tumble.

The volatile Shanghai Composite Index <.SSEC> shed earlier gains and fell 0.8 percent after regulators announced a flood of IPO approvals, while Tokyo's Nikkei <.N225> lost 1 percent, pulling further back from 7-1/2 year highs hit on Monday.

(Additional reporting by Paul Carrel in Frankfurt; Editing by Angus MacSwan and Crispian Balmer)

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