July 30, 2012 / 12:32 AM / 5 years ago

Stocks at three-week highs on stimulus hopes

A man passes a screen showing the activity of the FTSE index at Canary Wharf financial district in London August 5, 2011. REUTERS/Luke MacGregor

LONDON (Reuters) - Global stocks rose to their highest in more than three weeks on Monday, underpinned by expectations that the U.S. Federal Reserve and European Central Bank will provide stimulus to support their struggling economies.

Inflows into safe-haven German government bonds waned, keeping prices close to three-week lows after ECB President Mario Draghi said the central bank would do whatever it takes to preserve the euro, a message echoed by German Chancellor Angela Merkel and French President Francois Hollande.

This raised expectations that the ECB could take bold measures to lower soaring Italian and Spanish borrowing costs and supported riskier assets.

However, some investors doubted that ECB policymakers would deliver in line with market expectations when they meet on Thursday, and this kept the euro lower. Germany’s Bundesbank is opposed a resumption of the ECB’s bond-buying program.

“Markets have reached a point that has priced in action by the ECB,” said GFT market strategist Andrew Taylor. “This sets up a situation where (ECB President Mario) Draghi will now have to back his words with action or we could see markets tumble quicker than they rallied.”

The MSCI world equity index .MIWD00000PUS was 0.2 percent higher at 316.12 points, extending gains into a third straight day and trading at levels last seen in early July.

European stocks started higher. The FTSEurofirst 300 .FTEU3 index of top European shares was up 0.4 percent at 1,061.13 points.

Despite the rise in stocks, the euro fell 0.3 percent to $1.2285, well below a three-week high of $1.2390 touched on Friday. Still, it was trading above a two-year low of around $1.2042 struck last week before Draghi’s comments.

“There is a risk of disappointment at the ECB meeting on Thursday, but the market can continue to price ECB action and drive the euro higher over the days ahead,” said Michael Sneyd, FX strategist at BNP Paribas.

Markets will keep a close eye on Italy’s auction of up to 5.5 billion euros in bonds on Monday to see if expectations of bolder ECB policy moves could help ease benchmark 10-year yields.

Attention will also be on the U.S. central bank which holds a policy meeting this week. Speculation is rising the Fed may do more to bolster recovery, after data showed U.S. second-quarter gross domestic product expanded at a 1.5 percent annual rate, the weakest pace of growth since the third quarter of 2011.

Additional reporting by Blaise Robinson; Editing by Anna Willard

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