EUROPE MARKETS: European Stocks Trim Gains After Inflation Data Meet Views

By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- European stock markets moved higher on Friday, but trimmed gains midmorning as investors speculated whether lackluster euro-zone inflation data were weak enough to trigger more easing from the European Central Bank.

The data: Consumer prices in the currency union grew by a meager 0.3% in August, as expected. That was down from 0.4% in July and marked the lowest level in almost five years. While the reading initially adds more pressure on the ECB to launch new stimulus measures at its meeting next week, economists are divided in their view about the actual decision.

Earlier this week, ECB sources told Reuters that the central bank is likely to stand pat at the Sept. 4 meeting, unless the August consumer-prices report significantly pointed toward deflation.

"There is no doubt at all that this reading takes inflation down to a lower level than the ECB was expecting just a few months ago, but it is hard to see a 0.1 percentage-point decline on the month as a "significant" step towards deflation," said James Ashley, chief European economist at RBC Capital Markets, in a note.

At Royal Bank of Scotland, economists forecast a 10 basis point cut to all key interest rates as well as a "a constructive tone on the prospect of asset purchases in the future."

ECB President Mario Draghi spurred hopes for more easing in the euro zone last Friday when he struck a dovish tone at the Jackson Hole meeting and hinted at a full-on QE program in efforts to fight off the threat of deflation.

Aside from inflation data, Eurostat said euro-area unemployment remained at 11.5% in July. Italian joblessness rose to 12.6%, hovering around a 40-year high.

Ukraine-Russia standoff: Global stock markets were bruised by jitters in Ukraine on Thursday after Kiev said Russia had invaded Ukraine, a move Moscow denies. On Friday, NATO accused Russia of a "blatant violation" of Ukraine's sovereignty, saying the Kremlin has troops carrying out direct military operations on its neighbor's territory.

"Despite Moscow's hollow denials, it is now clear that Russian troops and equipment have illegally crossed the border into eastern and southeastern Ukraine," NATO's secretary-general, Anders Fogh Rasmussen, said in a statement.

Market reaction: The Stoxx Europe 600 index was up 0.1% at 341.50 in midday trade, trimming gains after the inflation numbers. The pan-European benchmark is headed for a 1.6% advance in August, which would mark the first monthly gain since May.

Germany's DAX 30 index gained 0.1% to 9,476.65, setting it on track for a 0.7% rise for all of August. France's CAC 40 index was up 0.2% at 4,376.31, with a 3.1% monthly gain in sight.

The U.K.'s FTSE 100 index added 0.2% to 6,816.81, with Tesco PLC capping gains for the benchmark after it issued a profit warning.

The euro (EURUSD) traded at $1.3189, up from $1.3171 ahead of the inflation data.

In Russia, the MICEX Index dropped 0.8% to 1,412.43. The ruble (USDRUB) dropped 0.6% against the dollar, with the greenback buying 36.9780, according to FactSet.

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