European shares rally, bonds fall on China's yuan assurances

Pan-European FTSEurofirst index of leading 300 blue-chips rises 1.4%

European shares rallied on Thursday after China's central bank said there was no basis for further yuan depreciation after a devaluation this week that has seen the currency slide around 4%.

The perkier mood in riskier assets soured investor appetite for safe-haven government bonds, which had benefited from a sharp sell-off in equity and commodity markets prompted by the devaluation.

The People's Bank of China (PBOC) said there was no basis for more yuan depreciation in light of strong economic fundamentals, even though the yuan dropped for the third straight day.

The PBOC set its guidance rate at 6.4010 per dollar prior to the market opening, weaker than the previous fix of 6.3306. The gap between the guidance rate and the traded spot market rate narrowed sharply as banking sources said the PBOC had stepped up intervention in a bid to stabilise prices.

Still, traders remained cautious. Sources told Reuters some powerful voices in the government were pushing for an even deeper devaluation to help China's struggling exporters.

PBOC Vice-Governor Yi Gang dismissed such talk as groundless, but some in the market still expected that China would let the yuan slide further in the face of weakness in the economy.

"Investors have pounced on those reassurances from China to push the markets back up a bit. They're taking the Chinese central bank at its word, but I'm still taking those comments with a pinch of salt," said Hantec Markets' analyst Richard Perry.

The pan-European FTSEurofirst index of leading 300 blue-chips rose 1.4% to 1,537.35 with national benchmark euro zone indexes broadly in line with that rise.

The MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.6%, after US shares rebounded overnight and two out of three main indexes ended in positive territory.

US FED FOCUS

The risk-averse mood after China's moves this week had heightened the appeal of safe-haven government debt, which then pushed down US and European bond yields.

Yields on German 10-year bonds were 2 basis points higher at 0.64% while benchmark US 10-year yields were 3 bps up at 2.16% in European trade, following a lacklustre auction on Wednesday.

The dollar, which had also suffered as investors pared back bets that the US Federal Reserve's long-awaited interest rate hike would come as early as its Sept. 16-17 meeting, rebounded on Thursday.

The dollar index was up 0.3% at 95.933, recoiling from a one-month low of 95.926 hit on Wednesday with focus also on US retail sales data due at 1230 GMT for further hints on the Fed rate outlook.

"The US clearly needs to watch the global economy and China, but ultimately, if we get a very strong release today, market expectations for a September interest rate hike will probably bounce right back," said Rabobank currency strategist Jane Foley.

Against the safe-haven yen, the dollar rose 0.3% to 124.56, although it remained below a two-month high of 125.28 yen set on Wednesday.

The euro edged down about 0.4% to $1.1110 after scaling a one-month peak of $1.1215 on Wednesday, helped by the unwinding of euro-funded carry trades in the yuan and other emerging market currencies.

In commodities trading, spot gold was down about 0.3% at $1,120.80 an ounce after logging its fifth straight session of gains.

Crude oil futures extended overnight gains made on lower US crude stockpiles, but remained not far from six-year lows plumbed this week on fears that China's weaker currency would hit its imports. US crude was up about 0.6% at $43.56 a barrel, while Brent rose back above $50 a barrel, adding about 1.3% to $50.28.