Stocks At Highs As China Rebounds; Euro Strong

Global stocks reached a record peak for a fourth day running on Tuesday after China shares bounced from heavy early losses.

Global stocks reached a record peak for a fourth day running on Tuesday after China shares bounced from heavy early losses, while the euro rose as solid economic data cemented expectations of higher interest rates.

Oil held firm above $70 a barrel as traders watched the progress of a cyclone in the Middle East that threatened to disrupt some production, and gold edged up to around $673 an ounce.

European shares edged up in early trade, with the FTSEurofirst 300 index 0.2 percent higher at 1,625 points, just below Monday's 6-1/2 year high, as traders eyed events in China.

The Shanghai Composite index tumbled as much as 7.3 percent before closing up 2.6 percent as rumours that the government would release a policy statement aimed at restoring investor confidence stemmed the selling.

The early declines took losses to 21 percent since last Wednesday when authorities tripled a stock trading tax to cool the spectacular bull run, but the index is still up 120 percent in the past year.

"The Chinese authorities have engineered a reversal in the short-term trend for domestic equity markets, but thus far there is little evidence that this is triggering global contagion," analysts at Barclays Capital said. "Wholesale risk reduction does not appear to be taking hold, and bearish sentiment is very much localised."

While other Asian markets initially dipped, there was no repeat of the widespread selling seen in late February when the Shanghai index tumbled 9 percent.

MSCI's index of Asia stocks excluding Japan recouped early losses to trade up 0.3 percent at a new life high while Tokyo's Nikkei 225 added 0.5 percent to close above 18,000 points for the first time since February.

The MSCI All-Country World Index hit a record peak of 405.79, a gain of more than 10 percent so far this year.

GIVE ME RISK

The appetite for stocks reflected a broader investor appetite for riskier assets, which helped to keep spreads on emerging market sovereign bonds over U.S. Treasuries near record tight levels and pushed one-month implied volatility in euro/dollar to a record low.

The yen continued to suffer as investors used Japan's low borrowing rates to finance investment in higher yielding assets elsewhere in the world in so-called carry trades.

"Overall, why buy the yen? The carry trade theme is going on. Risk appetite is high," said Antje Praefcke, currency strategist at Commerzbank Corporates & Markets in Frankfurt.

Data showing the euro zone services sector grew slightly faster than expected in May helped support the view that the European Central Bank will leave the door open for further interest rate increases after an expected rise to 4 percent on Wednesday.

The RBS/NTC euro zone services business index rose to 57.3 in May from 57.0 and employment growth in the sector hit an 11-month high.

"The recovery seems now fully sustainable, and with GDP (growth) steadily above trend, the ECB won't relax anytime soon," said Marco Valli, an economist at Unicredit.

"Rates will need to hit 4.5 percent by year-end before the ECB sees risks to price stability as more balanced."

With the focus on interest rate differentials, the euro hit an all-time high versus the yen at 164.61 and ticked up to a one-week high versus the dollar at $1.3514.

The solid data and looming ECB meeting kept pressure on euro zone government bonds, with the yield on 10-year Bunds nudging up to 4.463 percent.

Oil hovered above $70 a barrel after jumping more than $1 as a cyclone headed toward the oil-producing Arabian peninsula, raising concern about disruptions to shipping and oil production.

London Brent crude, currently seen as a better gauge of the global market than U.S. oil, traded at $70.11, easing off a high of $70.63 hit in the previous session as the cyclone looked likely to miss key production sites in Saudi Arabia and the United Arab Emirates.

Metals were also firm, with gold rising to around $672 an ounce and copper supported by a strike threat by mine workers in Mexico and by falling stockpiles.