Focus on Europe rates as economy slows

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - Europe will be a major focus of investors' attention this week as the European Central Bank and Bank of England meet separately to discuss interest rates against a backdrop of declining economic strength.

With global equity markets rallying and worries about the credit crisis easing, signs that U.S. economic woes are contagious could easily dent tentative investor optimism.

Global stocks as measured by MSCI gained 5.31 percent in April. Perhaps surprisingly, this was the largest monthly gain since December 2003.

Investors also unwound safe-haven plays, lifting yields and knocking investment bank Citi's world government bond returns index down 1.15 percent for the month. Gold is also at a four-month low.

But the tentativeness of this new risk appetite is clear from Reuters polls showing that although major investment houses across the world increased exposure to equities in April, they clung to above-average cash reserves.

Hanging on to cash is what professional investors do when they are uncertain about the future.

Much of the uncertainty swirls around the fate of the ailing U.S. economy. But worries that the U.S. downturn is spreading are also growing.

"There is little doubt that we will see contagion," said Klaus Wiener, head of research at Italy's Generali Investments, adding that it was already under way in Europe.