GLOBAL MARKETS-Japan's liquidity surge lifts stocks, dollar steady

Last Updated: Thu, Apr 11, 2013 12:00 hrs

* MSCI World up 0.5 pct to five-year highs

* Yen remains under pressure from BOJ stimulus

* China credit grows, supports economic recovery

* Gold hits one-week low despite Korean tensions

By Richard Hubbard

LONDON, April 11 (Reuters) - World shares extended their rally into a fourth day on Thursday supported by Japan's aggressive monetary easing and signs of a growing recovery in China, while the dollar held near a four-year high against the yen.

News the U.S. Federal Reserve may scale back its massive bond purchases later this year supported the dollar, while failing to dampen sentiment in share markets that has taken the S&P 500 share index to a record high.

"Given the Japanese have kick-started a new wave of quantitative easing, that's going to be the tide that lifts all boats," said Commerzbank economist Peter Dixon.

U.S. stock futures for both the Dow Jones Industrial Average and the S&P 500 point to the potential for more records to be set when Wall Street opens.

Since the Bank of Japan unveiled its radical stimulus programme a week ago, the dollar has gained about 7 percent, yields on major government bonds have fallen and the MSCI's world equity index has hit levels last seen in June 2008.

"The stronger-than-expected Japanese liquidity surge has led us to reassess our views on risky assets," said Salman Ahmed, Fixed Income strategist at Lombard Odier Investment Managers.

"However, we continue to believe that European concerns remain serious and the U.S. earnings season has the potential to produce a curve-ball after four years of sustained growth."

The market's latest gains have been helped by evidence of an economic recovery in China - notably signs of growing domestic demand and easier credit - and also by indications from the European Central Bank last week that it may cut rates.


Data out on Thursday showed Chinese banks made 1.06 trillion yuan ($171.2 billion) of new, local currency loans in March adding to the positive signal from trade figures on Wednesday which revealed a sharp rise in imports.

The fresh loans figure "shows that there is ample funding in the Chinese economy to support growth and is positive for sentiment", said Dariusz Kowalczyk, senior economist for ex-Japan Asia at Credit Agricole CIB in Hong Kong.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.9 percent after the Chinese data, helping lift the world equity index 0.5 percent, a day after posting its second best gain of the year.

Japan's Nikkei share average rose to its highest level since July 2008 due to the central bank's unprecedented stimulus measures, which are set to eclipse even the Fed's aggressive bond buying plans.

Europe's FTSE Eurofirst 300 index, which saw its biggest daily rise in three months on Wednesday, had extended the gains by 0.4 percent by midday, while London's FTSE 100 , the Paris CAC-40 and Frankfurt's DAX were between 0.3 and 0.5 percent higher.


The dollar rose as high as 99.88 yen in the currency markets but stayed just below the 100 yen level as traders await the expiration of large options contracts that have generated demand from banks to buy the yen and sell the greenback.

Once these expire, the dollar is expected to make a decisive break higher, helped by rising expectations the Fed will cut back on its bond-buying programme; these were reinforced by the minutes of the U.S. central bank's March meeting.

The dollar was down 0.2 percent on the day at 99.55 yen , while the less-constrained euro touched a fresh three-year high of 130.84 yen. The single currency's gain lifted it to a 1-month high against the dollar of $1.3132 .

In the debt market, safe-haven German government bond futures were easing as equities markets rallied and they saw further losses after Italy successfully auctioned 7.2 billion euros ($9.5 billion) of new debt.

Italian 10-year yields, down more than 50 basis points since late March, fell 3 basis points to 4.28 percent after the debt sale. The yields have now fallen around 15 basis points since inconclusive elections in late February left Rome without a new government.

The prospect of heavy money-printing in Japan has had little impact so far on a gold market that has been under pressure since European Commission documents showed Cyprus must sell around 400 million euros of gold reserves under a bailout deal.

Heavy outflows from exchange-traded funds, a second cut in six weeks in Goldman Sachs' 2013 gold price forecast and uncertainty over the U.S. Federal Reserve's stimulus programme have also dragged on prices.

However, the precious metal did bounce off its lowest level in almost a week as rising tension on the Korean peninsula stirred some safe-haven buying in Asia.

Gold hit its lowest since April 5 at $1,553.10 an ounce at one point before settling around $1,560, down 1.5 percent.

Oil prices steadied not far from an eight-month low after U.S. crude oil stocks hit their highest level in more than two decades and analysts cut forecasts for global oil demand growth.

Brent futures slipped 3 cents to $105.76 per barrel while U.S. crude futures fell 16 cents to 94.46 per barrel, ending three straight sessions of gains.

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