World shares rally as China offers markets a hand

By Nell Mackenzie and Amanda Cooper

LONDON (Reuters) -U.S. stocks were set to open higher on Monday after China announced measures to support its ailing markets, but markets remained cautious ahead of economic data expected later in the week due to determine central bankers’ next steps.

Beijing on Sunday said it would halve the stamp duty on stock trading, in its latest move to boost the struggling market and following its steps to support housing. China’s securities regulator also approved the launch of 37 retail funds.

S&P 500 futures edged up 0.1% while Nasdaq futures rose 0.2%, indicating last week’s modest rise may continue.

World shares were up 0.3% in European trading. European stocks, led by technology shares and China-exposed automakers, also rose. The pan-European stock index had climbed 0.6%. The FTSE was closed for a holiday.

The help was needed given profits at China’s industrial firms fell 6.7% in July from a year earlier, extending this year’s slump to a seventh month.

In addition, China Evergrande Group lost as much as 80% of its market value on Monday after its shares resumed trading – a key step for the world’s most indebted property firm as it seeks to restructure its offshore debt.

Foreign investors continued to flee from Chinese stocks, offloading a net 8 billion yuan ($1.10 billion), according to data from the Hong Kong Stock Exchange.

The Chinese blue chip stock index and the Shanghai Composite closed higher.

“If everything was rosy there would be no need for a stimulus,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers.

Unlike the bulk-sized packages announced in previous years, the latest measures represented a shift from the Chinese government to try and tactically lift the market mood where it saw fit, said Ielpo.

Traders are now awaiting official PMI data for August due out from Thursday, which is still expected to show activity is in the red.

The market did manage to weather a slightly hawkish outlook from Federal Reserve chair Jerome Powell, who reiterated they might have to raise rates again but promised to move “carefully.

The impression from the Fed has now become 50 shades of hawkish. We know rates will remain above 5% but the question remains for how long and how much higher?” said Lombard Odier’s Ielpo.

Futures imply around an 80% chance of no change at the Sept. 20 meeting, but a 58% probability of a hike by year end.

“This means tricky weeks ahead for risk assets. Economic data has yet to digest the full transmission of past rate hikes,” said a research note on Monday from Generali.

But the uncomfortable message from Jackson Hole may mean a protracted higher inflation than market bulls might have hoped, said the note.

DOWNSIDE RISK ON JOBS

Much will depend on the flow of U.S. data, including this week’s ISM survey on manufacturing, along with reports on payrolls, core inflation and consumer spending.

Median forecasts are for payrolls to rise 170,000 in August with a steady jobless rate of 3.5%.

JPMorgan analysts cautioned that job gains could be depressed by the entertainment industry strike in Hollywood and are tipping an increase of just 125,000.

Figures on European Union inflation this week may also be instrumental in whether the European Central Bank (ECB) decides to hike next month.

The market is evenly split on whether there will be another rise in the 3.75% rate, with ECB President Christine Lagarde on Friday emphasising that policy needed to be restrictive.

This was a common theme among Western central banks, with Bank of England Deputy Governor Ben Broadbent saying at the weekend that rates might have to stay high “for some time yet.

Odd man out, Bank of Japan Governor Kazuo Ueda, on Friday reiterated the need for policy to stay super loose.

That divergence kept the yen under pressure and early Monday the dollar was firm at 146.50, within a whisker of Friday’s near 10-month top of 146.64.

The dollar slipped from its multi-week high to $104.09 against a basket of currencies.

Yields on U.S. two-year notes fell slightly 0.1% after touching their highest since early July on Friday.

High yields and a relatively strong dollar have been a headwind for gold which was idling at $1,915 an ounce. [GOL/]

Oil prices drew some support from the storm developing in the Gulf of Mexico and China support. [O/R]

Brent rose 31 cents to $84.17 a barrel, while U.S. crude rose 15 cents to $79.68 per barrel.

(Reporting by Nell Mackenzie and Amanda Cooper; Editing by Stephen Coates and Hugh Lawson)