World stocks up strongly as China bounces back

[August 20, 2009]  LONDON (AP) -- World stock markets rose strongly Thursday after Chinese shares enjoyed their biggest rally since March, a day after slumping nearly 5 percent and officially entering a bear market.

In Europe, the FTSE 100 index of leading British shares was up 67.04 points, or 1.4 percent, at 4,756.71 while Germany's DAX rose 90.37 points, or 1.7 percent, to 5,322.35. The CAC-40 in France was 56.69 points, or 1.6 percent, higher at 3,507.03.

Earlier in Asia, Shanghai's main index surged 126 points, or 4.5 percent, to 2,911.58, while Japan's Nikkei 225 stock average advanced 179.41 points, or 1.8 percent, to 10,383.41. Hong Kong's Hang Seng rose 374.63, or 2 percent, to 20,336.36.

The gains in Asia came a day after Shanghai's big fall triggered a pullback around the world before Wall Street rebounded amid higher oil prices after an unexpected fall in U.S. crude inventories suggested rising demand.

"Tread carefully -- market sentiment is incredibly short-term at the moment and what happens in the market yesterday can very easily be reversed today," said Neil Mackinnon, chief economist at ECU Group.

"It's a very fickle market," he added.

As is often the case, much may depend on what happens on Wall Street when trading traditionally picks up after the Labor Day holiday in early September.

For now, U.S. markets were poised to open modestly higher. Futures for the Dow industrial average were up 48 points, 0.5 percent, at 9,324 while the broader Standard & Poor's 500 futures rose 6.2 points, or 0.6 percent, to 1,003.30.

Volumes were extremely light in holiday-trimmed trading so investors remained wary of making too many predictions about whether the big rally seen in stocks since March -- with a few downtrends since -- will continue through to the end of the year.

One effect of low volumes is that volatility tends to be higher.

On Wednesday, stocks around the world oscillated wildly, with a turnaround in the U.S. helping European stocks to close little changed on the day despite sinking around 1 percent earlier in the session.

"The intra day swings in stocks and risk appetite highlight a lack of direction at present and suggests an absence of long term players in the market as summer holidays continue to take their toll on trading activity," said Mitul Kotecha, analyst at Calyon Credit Agricole.

Leaving intraday volatility aside, Kotecha said the overall trend continues to be one of improving risk appetite and firming equities -- the S&P 500 index for example is up around 47 percent from its March lows.

One worry in the markets is that Chinese shares have begun to look a bit frothy. Many analysts consider the Chinese market a lead indicator for worldwide stocks -- over the last couple of years, Chinese stocks have led where others have followed. Sharp falls in the summer of 2007 proved to be a precursor to the start of the seizing up in credit markets, the prime cause of the global recession.

Before Thursday's advance, the Shanghai index was down more than 20 percent from its early August peak, officially putting it into bear market territory, having rallied 60 percent since the start of the year.

"The contagion effect of any fallout in China's equity markets should still not be ignored," said Kotecha.

Meanwhile, oil prices held steady above $72 a barrel after Wednesday's big rally in the wake of figures showing that U.S. crude in storage fell by 8.4 million barrels last week. That suggested an uptick in demand.

Benchmark crude for September delivery was down 5 cents at $72.37 after jumping $3.23 Wednesday.

The dollar rose 0.3 percent to 94.33 yen while the euro fell 0.1 percent to $1.4225.

[Associated Press; By PAN PYLAS]

AP Business Writer Stephen Wright in Bangkok contributed to this report.

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