World shares edged up and the dollar softened on Monday, fuelled by new evidence of modest global growth and a growing conviction that the U.S. Federal Reserve will stick with its massive stimulus effort.
The biggest mover in financial markets was the New Zealand dollar, which slumped to a one-year low following a milk powder contamination scare involving Fonterra, the world's biggest dairy products exporter.
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But in thin markets most investors were still preoccupied by the implications of last week's soft U.S. jobs report on the timing of the Fed's plan to begin to trim its $85 billion a month in bond purchases.
European shares had risen to a two-month high by mid-morning, following Wall Street's record close on Friday, as many investors took the view that the still-weak U.S. labour market would delay any Fed action beyond next month.
"The market is getting some support as the (U.S. stimulus) tapering timetable is likely to be changed," Mike van Dulken, head of research at Accendo Markets, said.
The MSCI world equity index had gained only 0.1 percent due to a softer session in Asia where Japan's Nikkei index fell 1.2 percent and shares in South Korea, Australia and Singapore all slipped.
The release of data showing business activity in July recovered some momentum in China, easing fears of a sharp slowdown, and increased for the first time in over 18 months across the euro zone, added to the positive tone in Europe.
Britain's key services sector also grew at the fastest pace in more than six years, according to the monthly Markit/CIPS Purchasing Managers' Indexes (PMIs).
The mounting evidence that easy central bank policies are powering a global economic recovery has supported demand for riskier assets over the past two months but fears the Fed could take its foot off the accelerator too soon have caused concern.
This has left traditionally thin markets during the summer months of the northern hemisphere vulnerable to wild swings whenever data reveals any growth surprises.
"Markets are very much driven in the immediate future by the data that gives us an idea as to when the (Fed) tapering is going to start taking effect," said Mark Keenan, cross-commodity research strategist at Societe Generale.
As investors on Monday trimmed dollar holdings on the latest jobs numbers, the greenback fell 0.6 percent to 98.34 yen and the euro held steady at $1.3285, clinging to Friday's 0.5 percent gain versus the dollar.
"It looks like we're in for a slightly choppy and frustrating time as the market tries to get some clarity on the Fed and what might happen in September," said Simon Smith, chief economist at FXPro.
DAIRY SOURS KIWI
The New Zealand dollar hit a low of $0.7670, its weakest since June 2012 on the brewing milk powder scandal.
China said it halted imports of dairy products from New Zealand after New Zealand dairy exporter Fonterra said at the weekend it had found bacteria in some products that could cause botulism.
"It's a pretty serious development for New Zealand given how important dairy is. But what usually happens with these food quality issues is that as details come out, people tend to feel more reassured," said Chris Tennent-Brown, FX economist at the Commonwealth Bank in Sydney.
The Australian dollar also slipped sharply, to a three-year low of $0.8848, after the country's retail sales data fell short of market forecasts and reinforced expectations of further rate cuts by the Reserve Bank of Australia (RBA).
DEBT PRICES FIRM
In the debt markets, U.S. 10-year Treasury notes traded at a yield of 2.6 percent, below Friday's high of 2.75 percent, which was itself just under a two-year high of 2.755 percent hit in July.
German government bonds also extended their gains from Friday with yields dipping 1 basis point to 1.64 percent . However, investors focused more on developments in Italy, where political risks were easing.
Former Prime Minister Silvio Berlusconi cooled concerns that his conviction for tax fraud would wreck the shaky coalition ruling Italy by backing the government of Enrico Letta at a protest rally in Rome on Sunday.
Ten-year Italian government bond yields fell 2.8 basis points to 4.26 percent.
In the oil market Brent crude rose above $109 a barrel despite the promising Chinese data, as supply disruptions by several Middle East and North Africa producers lifted prices.
Gold got a lift from the changing expectations over timing of any Fed slowdown in its quantitative easing policy to trade 0.2 percent higher at $1,314.26 an ounce as its rebounds from last week's lows below $1,300.