Global stocks gain with dimming chances of September rate hike

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - Global equity prices gained on Thursday after weak U.S. retail sales data undermined the argument that the Federal Reserve will raise interest rates next week.

The U.S. Treasury yield curve steepened to its steepest level in about two-and-a-half months as longer-dated debt fell, highlighting expectations that the Fed could hold off from raising rates at its two-day meeting set to conclude on Wednesday.

August U.S. retail sales fell more than expected, pointing to cooling domestic demand that further diminishes expectations for a Federal Reserve interest rate increase next week.

"The disappointing retail sales numbers really reinforces our view that it would be difficult for the Fed to lift rates next week," said Bill Merz, an investment strategist at U.S. Bank Wealth Management in Minneapolis.

Also on Thursday, U.S. weekly jobless claims data showed a tightening labour market with subdued layoffs last week, while underlying producer price inflation crept up in August.

The gap between five-year note yields and 30-year bonds yields widened to 129.70 basis points, the steepest since June 27.

Expectations that the Fed will wait longer to raise rates is causing the long bond to underperform as lower rates are likely to increase inflation longer-term, which erodes the value of the debt.

Futures traders are now pricing in a 12-percent chance of a rate increase this month, down from 15 percent on Wednesday, according to the CME Group's FedWatch tool.

MSCI's world stocks index , which tracks shares in 45 nations, rose 0.77 percent, boosted by a buoyant Wall Street. U.S. stocks rose, helped by Apple Inc's best four-day run since 2014 and higher oil prices.

The Dow Jones industrial average was up 200.65 points, or 1.11 percent, to 18,235.42, the S&P 500 gained 23.57 points, or 1.11 percent, to 2,149.34, and the Nasdaq Composite added 77.71 points, or 1.5 percent, to 5,251.48.

Apple's shares rose as much as 3.3 percent, giving the three major indexes their biggest boost after the company said that the first batch of its new iPhone 7 Plus was sold out globally.

European shares finished the day higher in choppy trading with UK supermarket Morrisons leading gainers following a strong earnings update. Europe's broad FTSEurofirst 300 index closed up 0.55 percent at 1,339.13.

Stocks in Tokyo closed at a three-week low amid uncertainty over interest rate policy.

Oil prices rose about 1 percent, tracking a rally in gasoline futures. A delayed restart of the main gasoline line at Colonial Pipeline, the No. 1 carrier for the motor fuel in the United States, pushed that market higher.

Brent crude settled up 74 cents, or 1.6 percent, at $46.59 a barrel, while U.S. crude settled up 33 cents, or 0.76 percent, at $43.91.

In currency markets, the U.S. dollar was little changed against a basket of major currencies.

The dollar, gave up earlier gains against the yen amid scepticism that any Bank of Japan action at its policy meeting on Wednesday will be effective in weakening the yen.

On Thursday, the Swiss National Bank and the Bank of England both held fire with any further moves to support growth or weaken their currencies.

Spot gold fell to a two-week low , trading down 0.48 percent to $1,316.26 an ounce.

(Reporting by Saqib Iqbal Ahmed; Additional reporting by Karen Brettell in New York and Yashaswini Swamynathan in Bengaluru; Editing by Daniel Bases and Nick Zieminski)