The euro hit a six-week high and shares rose on Monday as signs of growth in China and a slower contraction in Europe lifted demand but concern over the US budget crisis capped gains.
The latest readings from both official and private sector surveys of China's vast manufacturing sector showed activity picked up November, adding to evidence the economy is reviving after seven quarters of slowing growth. Final estimates of the euro zone's Manufacturing Purchasing Managers Index (PMI) for November showed factory activity declining at a slower rate, though the region is still on course for its worst quarter since early 2009.
"We are in an environment where the big picture risks are still there; the US fiscal cliff, the euro zone and China - on two of those (China and the euro zone) arguably things have been improving," Philip Poole, global head of macro investment strategy at HSBC Global Asset Management, said. The MSCI world equity index edged up about 0.25% to 333.5 points after all the PMI data, with Wall Street set to open firmer ahead of the release of the November ISM survey of US factory activity.
The Institute of Supply Management (ISM) index of national factory activity, one of two PMI surveys due, is expected to decline slightly to 51.3 for November, staying above the 50-line that separates expansion from contraction. Data on Monday also showed British factory output shrank much less than expected in November. However, investors are cautious about reading too much from the surveys while there is no solution in Washington on how to avoid a package of tax rises and spending cuts due in early 2013 which could send the giant economy back into recession.
"Any comment about markets in December is heavily contingent on the daily progress of the US fiscal cliff debate as well as no further accidents in Europe," said Andrew Bell, Chief Executive of Witan Investment Trust. "Both of these problems look under control, with some form of acceptable outcome/kicking of cans down the road (more) likely than a financial crisis."
In Europe, the FTSE Eurofirst 300 index of top European shares rose 0.8% to 1,128.17 points. London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were between 0.5 and 1.2% higher. Earlier gains in Asian markets had been kept in check by sluggish data on retail sales and labour demand in Australia, and weak factory activity levels in the major exporting nations of South Korea and Taiwan. Global investors steadily increased their equity positions in November as they became less concerned about fiscal woes on both sides of the Atlantic, according to the latest Reuters asset allocation poll. An overwhelming 90% of poll respondents expected a deal by year-end on the US fiscal cliff and 80% considered Greece will still be in the euro zone by the end of 2013, the poll of 56 leading fund managers showed.
The euro rose to a fresh six-week high against the US dollar of $1.3075 on signs of progress by Greece in making its debt sustainable and after Spain made a formal request for bank bailout funds from the European Union. Greece said on Monday it would buy back 10 billion euros ($13 billion) of its outstanding debt through a Dutch auction process, and set a price range above most market expectations. Sentiment was also helped by comments from German Chancellor Angela Merkel on Sunday who said Greece's creditors may even look at writing down more of its debt to help the country.
The moves encouraged more investors to buy other, riskier euro zone debt sending Spanish 10-year yields down 14 basis points to 5.2%. Italian yields were down 11 basis points to 4.39%, and low-risk German debt prices retreated. Oil and other commodity prices were caught in narrow ranges, underpinned by the firm Chinese data, with concerns about the US budget crisis limiting any upward moves. US crude futures were up 24 cents to $89.14 a barrel and Brent rose 34 cents to $111.57, while London copper was little changed at about $8,006 a tonne. Spot gold edged up 0.1% at about $1,717 an ounce.