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European shares jump and bond markets recover; February PMIs in focus

[March 01, 2021] LONDON (Reuters) - European shares jumped on Monday and the bond market calmed, with yields dropping from their recent spikes, while optimism about U.S. fiscal stimulus sent oil prices higher.

After Asian stocks rallied overnight, European share indexes opened higher, with the STOXX 600 up 1.7% at 0837 GMT. London's FTSE 100 up 1.8% and Germany's DAX was up 1.3%.

The MSCI world equity index, which tracks shares in 49 countries, was up 0.5%, recovering from the previous session's multi-week low.

The much-anticipated $1.9 trillion COVID-19 relief bill was passed in the U.S. House of Representatives on Saturday, and now moves to the Senate.

In the bond market, key yields fell from their recent highs.

The U.S. 10-year treasury yield was down around 4 basis points at 1.4118% at 0837 GMT, having dropped from Thursday's one-year high of 1.614%.

Germany's benchmark 10-year Bund yield was down around 5 basis points, also below last week's spike.

Market participants have become wary in recent weeks that, when economies re-open from their coronavirus lockdowns a combination of massive government stimulus and pent-up consumer demand will cause inflation to accelerate.

"There is little doubt in my mind that central banks will eventually lean quite hard against a sustained rise in yields," wrote Deutsche Bank strategist Jim Reid in a note to clients.

"They simply can’t afford to see it happen with debt so high."

Factory activity data for February is also in focus this week, with European PMIs due throughout the morning.

Manufacturing in Japan grew at its fastest pace in more than two years in February, as strong orders led to the first output rise since the start of the pandemic.

SLOWER PACE

But China's factory activity grew at a slower pace than in the previous month, missing market expectations, after COVID-19 related disruptions earlier in the year.

Helping sentiment was news that deliveries of the newly approved Johnson & Johnson COVID-19 vaccine should start on Tuesday.

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, February 25, 2021. REUTERS/Staff

"The outlook for equity markets remains positive for most of 2021," wrote Berenberg economists Kallum Pickering and Holger Schmieding in a note.

"Although yields will likely rise further to at least 2.0% for the US 10 year Treasury and 0.0% for German 10 year Bunds by the end of 2021, the increase in yields will lag behind the improvement in the outlook for nominal GDP growth and corporate earnings," they said.

"We expect clear forward guidance by the Fed that it will not taper its asset purchases until the labour market has healed and a faster pace of ECB asset purchases if necessary."

Oil prices jumped, with Brent crude futures up 1.8% and U.S. West Texas Intermediate (WTI) crude futures up 1.7%.

Front-month prices for both contracts touched 13-month highs last week.

The dollar rose, gaining 0.3% against a basket of currencies by 0839 GMT. The Australian dollar - which is seen as a liquid proxy for risk appetite - recovered.

Wall Street also looked set for a higher open, with S&P 500 futures up 1.2%. Nasdaq futures were up 1.7% at 0841 GMT, suggesting a recovery for tech stocks.

"The (tech) sector has come under pressure from rising yields, which tends to disadvantage growth sectors," wrote Mark Haefele, UBS global wealth management's chief investment officer, in a note to clients.

"Against this backdrop, we continue to favor cyclical parts of the market, including small and mid-cap stocks, along with emerging market assets," he said.

"But we do not expect the tech sell-off to extend much further and continue to see value in the sector for longer-term investors."

(Reporting by Elizabeth Howcroft, editing by Ed Osmond)

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