World stocks at highest in over two weeks, China's yuan firms

By Dhara Ranasinghe

LONDON (Reuters) - World stock markets rose to their highest level in more than two weeks on Monday as reassuring comments from the U.S. Federal Reserve chief, an easing in trade war jitters and a bid by China's central bank to stabilise the yuan lifted risk appetite.

A stronger-than-expected German business sentiment survey added to the upbeat mood in Europe, with stock markets in Paris and Frankfurt up 0.4 percent each. British markets were closed for a public holiday.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.1 percent and Japan's blue-chip Nikkei closed at a 10-week high.

That left the MSCI All-Country World index, which tracks shares in 47 countries, at its highest level since Aug. 9.

Comments from Fed chief Jerome Powell at the Jackson Hole symposium on Friday affirming that the U.S. central bank was sticking with its strategy of gradual rate hikes to protect economic growth sparked a rally in stocks that gathered pace as a new week swung into gear.

Helping to brighten the mood, U.S. and Mexican trade negotiators are seen as close to reaching a common position on the North American Free Trade Agreement (NAFTA), with Mexican Economy Minister Ildefonso Guajardo saying on Sunday talks have "continued to make progress".

The talks will resume on Monday and a positive outcome is expected to ease concerns about an escalation in global trade tensions.

"The (NAFTA) talks add to the sense that while the U.S. is still bogged down in its trade conflict with China, it is perhaps more willing to compromise elsewhere such as with Mexico and the EU," said Ulrich Leuchtmann, head of FX and emerging market research at Commerzbank in Frankfurt.

"It's decreasing the risk of a global trade war."

YUAN ON FIRMER GROUND

A strengthening in the Chinese yuan, one causality of heightened trade tensions, also boosted sentiment in world markets.

The yuan hit a 2-1/2-week high versus the dollar after China's central bank revived a "counter-cyclical factor" in its daily fixing to support the currency, arresting a record 10-week slide that has rattled global markets and irritated Washington.

The announcement was seen as the latest signal from the People's Bank of China that is not comfortable with further depreciation in the yuan which could spark capital outflows from the cooling economy.

A firmer tone in the currency helped lift Chinese shares to two-week highs, with the Shanghai Composite index closing up 1.9 percent.

The move also raised hopes that a yuan recovery could boost companies with significant dollar-denominated costs, such as airlines. China Southern Airlines gained 4.5 percent and Air China rose 3.25 percent.

"China just seems to be stabilising its currency and we're getting used to that fact now, so we're not looking at an ever-weaker CNY, which could raise issues," said Robert Carnell, chief economist and head of research, Asia-Pacific at ING, adding that "it reduces the scope for outflows".

ALL GO

On Friday, the S&P 500 index and Nasdaq Composite hit record highs, following Powell's comments. The gains cemented the S&P's longest-running bull market, as defined by some investors.

S&P 500 E-mini futures touched a record high of 2,885 during the Asia session, and were last up 0.25 percent at 2,883.75.

In Europe, data on Monday showed German business morale improved by much more than expected in August, suggesting that concerns about a global trade war among company executives in Europe's largest economy have eased.

The Munich-based Ifo economic institute said its business climate index jumped to 103.8 after 101.7 in the previous month.

That added to the upbeat tone in equity markets but weighed on safe-haven German bond yields, which rose to more than two-week highs.

"We have low volumes today, but the biggest risks the market were discounting were trade wars, so any reduction in trade war risk such as NAFTA talks or even Trump trying to find bilateral deals with everyone, has pushed U.S. shares to new records and will support markets," said Angelo Meda, head of equities and a portfolio manager at Banor SIM in Italy.

"The global economy is on track, there's less trade war risk, the only cloud on the horizon is Italy," Meda added, referring to upcoming budget talks in the weeks ahead.

In currency markets, the dollar steadied against its peers.

The dollar index, which tracks the greenback against a basket of six major rivals, was broadly flat at 95.180, after slipping more than 0.5 percent in the previous session.

The euro was little changed at $1.1609 after going as high as $1.1654, its strongest since Aug. 2, while hopes of progress in U.S./ Mexican NAFTA talks lifted the Mexican peso 0.8 percent to 18.78 per dollar.

Oil prices fell, while gold edged lower as the dollar recovered.

(Reporting by Dhara Ranasinghe; Additional reporting by Tom Finn and Helen Reid in London and Andrew Galbraith in Shanghai; Editing by Alison Williams)