China Data Lifts World Markets, Fed Doubts Cap Gains

An upswing in Chinese exports lifted world equity markets on Monday, though worries about Syria and uncertainty over when and by how much the U.S. central bank will cut its stimulus programme saw investors hedge their bets.

Investors voiced doubts over the Federal Reserve's likely next move after a mixed jobs report on Friday.

"Most people felt that September was nailed on for Fed tapering, and it was only a question of the amount," Daragh Maher, currency strategist at HSBC.

"It's looking slightly more dubious now."

The uncertainty saw benchmark 10-year Treasury note yields edge back from two-year highs above 3 percent to close to 2.9 percent on Monday, though the equivalent German bond yield rose two basis points to 1.964 percent.

"We will continue to see quite a volatile interest rate market until there is more clarity about what tapering really is going to be," said Hans Stoter, chief investment officer at ING Investment Management.

Economists polled by Reuters still mostly expect the bank to scale back its stimulus at its policy meeting on Sept. 17-18. Two Federal Reserve officials over the weekend suggested the "tapering" plan is still on track.

U.S. stock index futures signalled that Wall Street was likely to start the day on a positive note, aided by signs of renewed growth in China's economy.

EMERGING RELIEF

Following a hint by Fed chairman Ben Bernanke in late May that a gradual reduction in the central bank's monthly stimulus was near, bond yields have risen in developed markets, reversing the strong flows of capital into emerging markets.

But the pressure on emerging markets has eased as more and more data confirms that the global economy is slowly gathering momentum, which improves their trade outlook.

That view got a boost at the weekend when China, the world's second-largest economy, reported surprisingly strong growth in exports during August as inflation remained subdued.

The data boosted MSCI's broadest index of Asia-Pacific shares outside Japan by 0.9 percent, with both Hong Kong's Hang Seng Index and Seoul's Kospi hitting their highest levels for about three months.

China publishes industrial production and retail sales numbers on Tuesday, which should add to signs the economy is on track to hit its target of 7.5 percent growth this year.

The MSCI emerging equities index rose 1 percent to a three-week high and has rallied more than 3 percent in the last four trading session, helped by the stronger Chinese data. While MSCI's world equity index gained 0.2 percent for a sixth successive daily rise.

European shares bucked the trend, however, sliding as disruptions to business in the Middle East hurt oil firm BG Group and the threat of a spike in crude prices fuelled profit-taking on construction firm Bouygues.

The broad FTSE Eurofirst 300 index was 0.3 percent lower though it is still up 6.4 percent since the start of July, more than twice as much as the U.S. S&P 500.

ING's Stoter said the outlook for equities remained strong despite the uncertainty surrounding the Fed's next policy move and the potential ramifications of a military strike on Syria.

"It's more a cautious time, which means that you take a modest risk on approach. So rather than being really long equities you take a small positive stance to equities but tilt the portfolio to cyclical sectors," he said.

TOKYO GLOW

Tokyo's success in bidding to host the 2020 Summer Olympics boosted Japanese shares although it weakened the yen, carrying on an inverse correlation between the two in recent months.

The Nikkei share average rose 2.5 percent to a five-week high, helped also by an upward revision to April-June gross domestic product data.

The dollar rose 0.4 percent to 99.55 yen having hit a high of 100.11 yen earlier in the session. The euro rose 0.5 percent to 131.25 yen.

The euro was flat at $1.3175, taking a breather after Friday's 0.5 percent gain. Investors were keeping a nervous eye on Rome where the Italian Senate is set to begin a debate on whether to expel former premier Silvio Berlusconi from parliament. A decision to expel him could threaten the country's ruling coalition.

Meanwhile, the Australian dollar touched a three-week high at around $0.9222, thanks to the trade data from China, which is Australia's single biggest export market.

Oil markets looked past the Chinese data to focus on Syria after Russia and China again urged the United States to avoid military action ahead of a key vote by the U.S. senate.

The global Brent crude benchmark fell 67 cents to $115.45 though has gained more than 1.5 percent in September. U.S. oil lost 45 cents to $110.08.