World stocks up as yuan move triggers risk rally

By Natsuko Waki

LONDON (Reuters) - World stocks hit a five-week high, oil jumped and the euro rose briefly on Monday after China pledged at the weekend to unshackle the yuan, easing tensions with the West and boosting confidence in the global economy.

Spot yuan climbed to its highest level against the dollar since its last revaluation in July 2005 in a clear signal that Beijing was sticking to its word that it would allow greater currency flexibility.

Coming just days before a Group of 20 summit in Toronto, China's move would boost purchasing power and demand in the world's third largest economy, encouraging investors globally to buy risky assets.

A higher yuan would also help temper inflation in China by pushing down import prices, which in turn could mean Beijing would have less need to tighten monetary policy aggressively.

"China's flexibility comment has shown that it has confidence in its own economy and that is good news for the global economy, which is lifting commodity prices and therefore miners," said Richard Hunter, head of equities at Hargreaves Lansdown.

Unlocking the yuan http://china.thomsonreuters.com/yuan/

Graphic on yuan movements http://r.reuters.com/sut87k

Insider TV

-- Yuan to rise before G20 http://link.reuters.com/jes92m

-- Yuan NDFs overshoot http://link.reuters.com/jup72m

MSCI world equity index rose 1 percent, hitting its highest level since mid-May.

The FTSEurofirst 300 index was up 1.4 percent, rising for the ninth straight session to hit a 5-1/2 week peak, with basic resources stocks being the biggest gainers.

Emerging stocks rose 2.3 percent to a six-week high while emerging sovereign debt spreads tightened 8 basis points to 302 bps, their narrowest in five weeks.

U.S. stock futures rose around 1.5 percent, pointing to a firmer open on Wall Street later.

"The move appears to reflect increased confidence that the Chinese and world economies are growing in a stable and sustainable fashion," UBS said in a note to clients.

"Almost certainly, China's leadership would not have taken this step unless they were confident about economic and financial stability."

U.S. crude oil rose 1.4 percent to $78.25 a barrel while spot gold hit a record high of $1,264.90 an ounce, helped by the fall in the dollar, which lost around 0.1 percent against a basket of currencies.

The euro rose to a one-month high near $1.2490 before erasing gains to $1.2382, down 0.4 percent on the day.

Breaking the peg might mean China needs to buy less U.S. dollars in intervention, which would leave it with fewer dollars to buy U.S. Treasuries, but also less need to diversify its holdings into currencies like the euro.

Bund futures fell 19 ticks as improving risk appetite reduced demand for safe-haven government bonds.

(