Sterling shines after UK data, China lending calm helps shares

Wed Jan 22, 2014 6:03am EST
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By Marc Jones

LONDON (Reuters) - World stocks edged back towards 5-1/2 year highs on Wednesday as moves to cool lending-market tensions in China gave an extra boost to the brightening global economic outlook.

An upgrade of the International Monetary Fund's world forecasts on Tuesday has lifted sentiment in equity markets and some encouraging company earnings meant European shares were quickly in their stride again as the rally in southern euro zone government bonds also resumed.

With the U.S. Federal Reserve expected to make a second small cut to its huge stimulus program next week, the dollar .DXY remained broadly supported near a two-month high against a basket of currencies.

Grabbing the spotlight was the UK, as another sharper-than-expected fall in unemployment, to 7.1 percent, provided fresh proof of a strengthening economy and bolstered speculation that a Bank of England rate rise may not be too far off.

Minutes from the Bank of England's last meeting, released at the same time as the data, showed policymakers now acknowledged unemployment was likely to fall to the 7 percent threshold they have set for reviewing the bank's policy, "materially earlier" than expected.

The news sent sterling surging to its highest in a year against the euro, up against the dollar while UK government bonds, or gilts, lost out as investors sought out higher-rewarding alternatives.

"It will certainly be the big challenge for Bank of England governor Mark Carney and the MPC (Monetary Policy Committee) in managing the forward guidance," said Michael Hewson, chief strategist at CMC Markets.

"What does he do when it does hit 7 percent? ... I think the only way is up for the pound."   Continued...

A man looks at at an electronic stock quotation board outside a brokerage in Tokyo January 14, 2014. REUTERS/Issei Kato