LONDON Shares gained and the euro hit a one-week high on Monday as China's move to beef up banking activity supported optimism for global growth and as Greece edged closer to securing a bailout, though rising oil prices weighed on the recovery hopes.
Trading was subdued as euro zone ministers gathered to discuss the Greek deal, with the closure of U.S. markets for a holiday having the potential to exaggerate any price moves.
The finance ministers are expected to approve a second bailout for Greece later in the day to try and draw a line under months of uncertainty that has shaken the currency bloc, although more work was still needed to make the numbers add up.
"Today we are aiming to finalize the decision on a new rescue package for Greece," German finance minister Wolfgang Schaeuble said on his way into the meeting in Brussels.
The euro traded was up 0.7 percent at $1.3244, off a one-week high of $1.3277, but mainly in reaction to China's decision on Saturday to cut the amount of cash its banks must hold in their reserves, with traders expecting any Greek deal to bring only short-term gains.
"I think we will see a rally, but not a strong rally because we've been trading this topic (Greece) for a long time," said Niels Christensen, FX strategist at Nordea.
"Even if we get a deal there are still issues about (debt) restructuring and how the portfolio of Greek bonds at the ECB will be dealt with."
Although a Greek deal is expected to initially help other peripheral European bond markets, worries the restructuring could push private bond holders further behind official lenders when it comes to taking forced losses, limited the gains for Spanish and Italian debt.
Italian 10-year yields fell 5 basis points to 5.54 percent while similar Spanish 10-year government bond yields were also lower on the day, down 11 basis points at 5.16 percent.
The European Central Bank, which effectively capped a rise in peripheral yields at the end of last year with its controversial market support program, announced it did not buy any government bonds last week for the first time since it restarted purchases it in early August.
CHINA LENDS A HAND
China's move to help growth in the world's second-biggest economy formed part of a global trend towards easier monetary policy by major central banks, aimed at supporting a fragile economic recovery being led by the giant U.S. economy and underpinning demand for riskier assets this year.
The latest action lifted copper and gold prices, which rose 0.6 percent and 0.5 percent respectively and boosted the Australian dollar by 0.5 percent to around $1.0763.
Gold is nearly 11 percent so far this year, benefiting from the rebound in the euro and expectations that U.S. monetary policy will remain loose, cutting the cost of holding non-yielding bullion. But analysts say the appeal of other investments could keep the metal rangebound this year.
Interest rate expectations - 2012 and 2013 (live graphic): link.reuters.com/kux64s
Commodities performance in 2012: link.reuters.com/faz36s
The recent flurry of central bank moves, which included a surprise easing by the Bank of Japan on February 14, have been a major factor behind the rally in global equities over the past two months.
The MSCI world equity index .MIWD00000PUS rose 0.5 percent on Monday to post gains of over nine percent this year.
The FTSEurofirst 300 .FTEU3 index of top European shares was at its highest level since early August, up 0.5 percent as resource companies benefited from expectations that China's policy action would boost demand for commodities.
On Friday in New York the S&P 500 index .SPX ended its sixth positive week out of seven so far in 2012, lifting it near levels not seen in more than three years. The index has risen 8.2 percent so far this year.
Emerging stocks hit six-month highs for a second straight trading session on Monday with the MSCI emerging equities index .MSCIEF gaining 0.35 percent.
Riskier assets like equities may get another shot in the arm next week when the European Central Bank offers more cheap three-year funds to the region's banks. Polls by Reuters have shown the ECB could lend around half a trillion euros at the tender on February 29.
But analysts point to another consequence of the flurry of policy easing - the rising price of oil - as a growing risk to the growth outlook.
J.P. Morgan Chase raised its 2012 price forecast for Brent crude by $6 to $118 a barrel on supply risks and rising economic growth. It also hiked its forecast for 2013 to $125 from $121.
Brent crude briefly rose to an eight-month high above $121 a barrel on Monday before settling to trade around $120, as Iran halted exports to Britain and France months ahead of a European Union embargo.
U.S. crude oil futures rose $1.75 to $105 a barrel.
"The recent price increase has been even sharper in recessionary Europe with Brent priced in euros close to record levels," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ in London.
"The growing headwind will both reinforce recessionary forces and dampen any recovery."
(Additional reporting by Nia Williams; Editing by John Stonestreet and Toby Chopra)