Germany, China lift world stocks, Spanish worries simmer

By Nigel Stephenson

LONDON (Reuters) - World shares rose on Monday, with Chinese stocks hitting 21-month highs and the German index setting a new record, while political uncertainty triggered big moves in sterling, the Turkish lira and Spanish debt.

European shares rose. The pan-European STOXX 600 index added 0.2 percent and Germany's DAX touched an all-time high after data showing industrial output far overshot forecasts. The DAX later gave up its gains.

Spanish shares outperformed, rising 0.6 percent, and Spain's government bond yields fell after a big show of support for the country remaining together and against Catalan independence appeared to calm markets.

Hundreds of thousands demonstrated on Sunday in the Catalan capital Barcelona, carrying banners saying "Catalonia is Spain" and "Together we are stronger". Catalan leader Carles Puigdemont was due to address the regional parliament on Tuesday on "the current political situation".

"Some of the uncertainty has been reduced -- the tone from Puigdemont has become more conciliatory and (Spain's Prime Minister Mariano) Rajoy has also stepped back," said Peter Chatwell, head of euro rates strategy at Mizuho.

Spain's 10-year bond yield fell 7.5 basis points at 1.64 percent.

On their first day of trade after a week-long holiday, Chinese blue-chip stocks touched their highest levels since late 2015, partly in a delayed reaction to a targeted cut in the amount of cash some banks must hold in reserve bank announced a week ago.

That outweighed data on Monday showing activity in China's service sector grew in September at its slowest since December 2015.

MSCI's broadest index of Asia-Pacific shares outside Japan was last down 0.1 percent, having rebounded by 1.7 percent last week. An index of world stocks tracking shares in 46 countries, however, was up less than 0.1 percent but just shy of a record high.

Wall Street also looked set to open higher on Monday. E-mini futures on the S&P 500 were up 0.1 percent.

The S&P 500 fell on Friday after six days of gains following data showing U.S. employment fell in September for the first time in seven years, although wage growth accelerated.

U.S. stocks are due to trade on Monday, although the bond market is closed for a holiday. Tokyo markets are also shut.

The dollar fell 0.1 percent against a basket of currencies. The greenback was all but flat against the Japanese yen on concerns that North Korea was preparing a new missile test.

The yen was last at 112.61 per dollar, having fallen as low as 113.44 per dollar last week. The euro edged up 0.1 percent to $1.1741.

The Turkish lira fell as much as 2.5 percent against the dollar and Istanbul stocks fell 4 percent after the United States and Turkey cut back visa services in a sharp deterioration in relations.

The lira last traded at 3.6948 per dollar, down 2.2 percent on the day, and stocks were down 3.1 percent.

A U.S. consulate employee was arrested last week on charges of links to U.S.-based Muslim cleric Fethullah Gulen, blamed by Ankara for last year's failed military coup. Washington condemned the arrest as baseless.

"Turkey's economy, especially the private sector, significantly relies on USD funding, the disruption of which can cause economic and financial disarray to Turkey" analysts at TD securities said in a note.

Sterling rose 0.6 percent to $1.3112 on reports that British Prime Minister Theresa May, facing threats to oust her, might sack her foreign minister, Boris Johnson.

"If Boris Johnson were to leave or be demoted as the weekend press is suggesting, that would be showing May's leadership and that her vision of Brexit is the one that (the government) will be going forward with and that markets should be aligned to," said Viraj Patel, an FX strategist at ING Bank in London.

Gold hit a one-week high as tension over North Korea saw some investors seek safety in the metal. It rose 0.5 percent to $1,282 an ounce.

(Additional reporting by Wayne Cole in Sydney; Editing by Gareth Jones)