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China move spurs equity, commodity gains

LONDON (Reuters) - World stock and commodity markets surged on Monday in reaction to China’s plan to spend nearly $600 billion on stimulating its economy as G20 finance ministers pledged to do what is needed to revive financial markets.

Wall Street looked set for a solid start.

Oil leapt nearly 6 percent to more than $64.50 a barrel. Gold rose 2.5 percent to around $755 an ounce and London copper jumped 8.5 percent.

Demand for government bonds fell along with the rise in stocks, sending yields higher as investors found equities more attractively priced.

“The China stimulus package has had a stabilizing effect near-term,” said Ian Stannard, FX strategist at BNP Paribas.

“But in the longer term there remain concerns about the global economy and the fact that China is needing to take such drastic action.”

China’s official Xinhua news agency said on Sunday the world’s fourth-largest economy had approved 4 trillion yuan ($586 billion) in new government spending between now and 2010, focused largely on infrastructure and social projects.

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That is close to 18 percent of China’s Gross Domestic Product this year. Equity markets jumped on the prospect for reflated growth.

The pan-European FTSEurofirst 300 was up 2.8 percent while Japan’s Nikkei average closed 5.8 percent higher.

In emerging markets, stocks as measured by MSCI gained 3.5 percent, but some currencies inched lower on the back of cuts in the debt ratings of a swathe of countries in the sector by ratings agency Fitch.

“The profound shift in the global economic and financial outlook poses significant real economy and policy challenges for emerging markets,” David Riley, head of Fitch’s global sovereign ratings group, said.

HIGHER YIELDS

Euro zone government bonds and U.S. Treasuries sold off.

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The interest rate-sensitive two-year euro zone Schatz yield was up 7 basis points at 2.476 percent and the 10-year Bund yield gained 6 basis points to 3.739 percent.

Glenn Maguire, Asia chief economist at Societe Generale, said interest rate cuts, bigger government spending globally and a likely recovery in corporate investment next year should sow the seeds for an economic rebound.

“Economic activity can only accelerate. Beware of the doom merchants,” he said.

On foreign exchanges, the dollar retreated against the euro and the low-yielding yen fell broadly.

The euro rose 1.5 percent against the dollar to $1.2921.

The yen fell broadly, with the dollar up 1 percent at 99.30 yen and the euro jumping 2.3 percent to 125.41 yen.

Additional reporting by Jessica Mortimer; Editing by Ruth Pitchford

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