By Marc Jones
LONDON (Reuters) - Investors took reassurance from remarks by the head of the Federal Reserve and stronger-looking emerging markets helped keep a world stocks rally alive on Tuesday in a solid start to the second quarter.
Wall Street looked set for a firm opening as major currencies and bonds kept up their cautious jockeying before this week's European Central Bank meeting and U.S. jobs data.
A flurry of merger-and-acquisition activity had helped enliven the wait for European bourses, as a 0.4 percent rise put them on track for a sixth straight day of gains after they faltered in February and March.
Global shares were also supported by Fed Chair Janet Yellen, who reinforced the need for "extraordinary" commitment to support the U.S. economy.
Her comments, appearing to reduce the chances of early interest rate rises, helped keep a lid on the dollar which in turn eased the euro off its recent lows to $1.3796.
The euro remained hampered though by talk the European Central Bank, which meets on Thursday, may have to cut interest rates again in coming months to keep deflation at bay.
Worryingly for policymakers, Markit's Purchasing Managers' Index on Tuesday showed that despite growth in all corners of the euro zone, companies have resumed cutting prices to drum up business.
Echoing an IMF warning on Monday, EU Economic and Monetary Affairs Commissioner Olli Rehn said he was anxious about decelerating inflation.
"I am concerned about a possibility of having a prolonged period of low inflation in the euro zone, because this would negatively affect the rebalancing process of the euro zone economy," he told reporters at a meeting of EU finance ministers in Athens.
With Wall Street now penciling in early next year for the first rise in U.S. interest rates since the financial crisis, Tuesday's main focus was 10.00 a.m. EDT ISM manufacturing data.
"What is important will be whether the impact of the cold weather at the start of the year has already dropped out," said Rabobank's U.S.-focused economist Philip Marey.
Asian stocks had climbed to a four-month high overnight as a rebound in emerging markets helped to offset a minor slip by Japan's Nikkei, subdued by the prospect of new taxes cooling the economy.
MSCI's main EM index was at a three-month high, having outperformed the S&P 500 in recent weeks.
Calm in Crimea also helped Russia's ruble and main stock market climb to their highest since February, while lackluster Chinese data bolstered talk of Beijing bringing in selective stimulus.
"I don't belong to the doom and gloom brigade on China," said Nick Beecroft, chairman and senior market analyst at Saxo Capital Markets. "I think there is a longer-term rebalancing taking place."
Lower-risk assets that drew investors last month, at the height of the Ukrainian crisis, lost ground.
German government bonds eased and gold, one of this year's surprise star performers, hovered near a seven-week low at $1,285.70 per ounce.
The yen, another traditional safe haven, slipped to a three-week low against the dollar and a nine-month low against the risk-sensitive Australian dollar.
Italian and Portuguese bond yields edged back towards historical lows and Greek bonds outperformed for a second day.
"We had assurance from the Troika institutions that Greece is fully financed for the coming 12 months," Jeroen Dijsselbloem told a news conference after a meeting of finance ministers.
Among commodities, crude futures were off three-week highs as news of Russia withdrawing troops from the Ukrainian border was complimented by hopes of a deal to re-open Libyan ports.
U.S. futures stood at $101.31 per barrel, off Friday's high of $102.24, Brent dipped to $107.58. Copper prices hovered just off a three-week high.
"It's generally accepted that the Chinese economy is on a slowing trajectory," said James Glenn of National Australia Bank in Melbourne. "(But) we expect global demand to pick up gradually over 2014 as the advanced economies start to see some improvement."
(Additional reporting by Melanie Burton in Sydney; Editing by Larry King/Ruth Pitchford)
- European Central Bank