Central bank stimulus hopes shore up markets

Associated Press

LONDON (AP) — Expectations that central banks around the world will act to boost the global economy combined with optimism over Europe's latest efforts to deal with its debt crisis to send European stocks higher again Tuesday.

A round of disappointing manufacturing surveys on Monday — mainly in China and the U.S., the world's two largest economies — has pushed investors to expect that central banks will ease monetary policy further in the coming weeks.

The Federal Reserve has in recent months been hesitant to provide significant new stimulus, but the latest data may be enough to convince it to act decisively. Monday's survey by the Institute for Supply Management showed the U.S. manufacturing sector contracting for the first time since the country was in recession three years ago.

"Clearly, the risks to the global economy are to the downside," said Neil MacKinnon, global macro strategist at VTB Capital. "The reaction of the equity markets is to believe that 'poor' economic data hastens the onset of more monetary stimulus."

On Thursday, the European Central Bank and the Bank of England are widely-expected to provide new help to the economy. The ECB is expected to cut its key interest rate to a record low below 1 percent while the Bank of England appears ready to launch another monetary stimulus that involves boosting the amount of money in the economy.

Amid those hopes, Germany's DAX closed 1.3 percent higher at 6,578.21, while the CAC-40 in France rose 1.0 percent to 3,271.20. The FTSE 100 index of leading British shares gained 0.8 percent to 5,687.73. The euro was up 0.3 percent at $1.2610.

In the U.S., the Dow Jones industrial average was up 0.6 percent at 12,943.06 while the broader S&P 500 index rose 0.4 percent to 1,370.81. Trading is expected to lighten through the day ahead of Wednesday's Independence Day holiday.

Markets have been relatively buoyant since Friday, when the leaders of the 17 countries that use the euro agreed a series of measures that investors concluded will reduce the risk that Italy and Spain, the eurozone's third and fourth largest economies, from needing a sovereign bailout anytime soon.

Among the measures agree was the creation of a central authority that can rescue banks directly, without adding to government debt, and changes to the way the bailout fund operates.

But in the longer-term, the eurozone still faces huge problems — debt levels remain high in some countries and six of the 17 countries in the currency bloc are in recession. Unemployment hit 11.1 percent in May, the highest since the euro was launched in 1999.

"Ultimately, to be successful, Europe needs investors to have confidence in buying government debt and they need them to fund the likes of Italy and Spain at rates that the countries can afford," said Gary Jenkins, managing director of Swordfish Research. "It is too early to say whether or not they have managed to persuade the bond market to take that step yet, but if I had to guess I would say that I doubt it."

Earlier in Asia, Japan's Nikkei 225 index rose 0.7 percent to 9,066.59 and South Korea's Kospi gained 0.9 percent to 1,867.82. Australia's S&P/ASX 200 fell 0.1 percent to 4,127.20 while China's Shanghai Composite advanced 0.1 percent to 2,229.19.

Hong Kong's Hang Seng jumped 1.5 percent to 19,735.53. Markets in Hong Kong were closed Monday to commemorate the hand-over of the territory to China in 1997.

Oil prices continued to recover alongside equities — benchmark oil for August delivery was up $3.65 at $87.40 a barrel in electronic trading on the New York Mercantile Exchange.

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Alex Kennedy in Singapore contributed to this report.

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