Stocks rise as China offsets Bernanke, gold falls

A trader watches screens at his desk at the Frankfurt stock exchange June 5, 2012.

NEW YORK (Reuters) - Global stocks rose on Thursday after China unexpectedly cut interest rates to shore up growth, but optimism was tempered by Federal Reserve Chairman Ben Bernanke, who disappointed investors looking for further stimulus for the U.S. economy.

Gold tumbled nearly 2 percent as investors unwound bullish bets built on expectations of Fed easing. Bullion was hit particularly hard compared with equities and other commodities, as it has been heavily used by institutional investors to hedge against economic uncertainties.

Bernanke, in testimony to Congress, said the Fed was ready to shield the U.S. economy if financial troubles mount, but offered few hints that further monetary stimulus was imminent.ž

He said the central bank was closely monitoring "significant risks" to the U.S. recovery from Europe's debt and banking crisis, but struck a decidedly different tone from the central bank's No. 2 official, who argued in favor of monetary support on Wednesday.

"Bernanke threw traders a curve ball. After his vice chair made it seem like (quantitative easing) was a foregone conclusion, he really messed people up. We tried to shake that off but there was a lack of follow-through and we lost momentum," said Phil Flynn, senior market analyst with PFG Best in Chicago.

The MSCI world equity index .MIWD00000PUS rose 0.7 percent to 301.16 points, after hitting its highest level in more than a week.

Hopes that central banks in the United States and Europe would act to bolster the global economy had driven world shares up more than 3 percent this week after steep losses in May.

U.S. stocks closed mixed. The Dow Jones industrial average .DJI ended up 46.17 points, or 0.37 percent, at 12,460.96. The Standard & Poor's 500 Index .SPX was down 0.14 point, or 0.01 percent, at 1,314.99. The Nasdaq Composite Index .IXIC was down 13.70 points, or 0.48 percent, at 2,831.02.

European shares closed higher, but well off an earlier peak. The FTSEurofirst 300 .FTEU3 closed up 1.1 percent at 984.62, its highest close since May 29.

The euro slipped 0.1 percent to $1.2562 in volatile trade. It briefly extended losses after Fitch slashed Spain's credit rating by three notches and signaled it could make further cuts as the cost of restructuring the country's troubled banking system spiraled and Greece's crisis deepened.

Against the yen, the dollar rose 0.4 percent to 79.56.

CHINA'S SURPRISE CUT

China delivered twin surprises on interest rates on Thursday, cutting borrowing costs to combat faltering growth while giving banks additional flexibility to set competitive lending and deposit rates in a step along the path of liberalization.

China's first rate cut since the global financial crisis underlined heightened concern among policymakers worldwide that the euro area's deepening debt problems are threatening economic growth.

The news had earlier boosted oil prices on expectations that faster growth in the world's largest energy consumer could boost demand. But gains faded after Bernanke's comments dimmed hopes of more U.S. stimulus.

Brent crude slipped 71 cents to settle at $99.93 a barrel, after rising as high as $102.45 a barrel. U.S. crude fell 20 cents to settle at $84.82, after reaching $87.03.

Spot gold was down 1.7 percent at $1,589.30 an ounce, off a high of $1,628.80 an ounce.

U.S. Treasuries prices erased losses after Bernanke's comments. The benchmark 10-year U.S. Treasury note was up 4/32, the yield at 1.6473 percent.

The better tone in the markets allowed Spain to sell 2.1 billion euros of fresh debt on Thursday, just days after the country's treasury minister warned that access to the credit markets was under threat.

Yields initially fell 10 basis points on Spain's existing 10-year bonds after the auction, to 6.2 percent.

"The fact is, Europe is still laying in the background. China cutting rates is seemingly a positive and Bernanke was neutral to slightly negative, but you have to put it all in the context of the negative we are still dealing, which is Europe," said Tom Porcelli, chief U.S. economist, RBC Capital Markets in New York.

(Additional reporting by Caroline Valetkevitch and Julie Haviv; Editing by Dan Grebler)