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Shares rise as policy easing hopes grow

European shares joined a global stock market rally on Tuesday as expectations rose that major central banks will take more action to support the world economy, after factory data highlighted the drag on growth being caused by the euro zone debt crisis.

The euro was steady near $1.26 to the dollar due to growing doubts about a new European plan to support indebted countries, and on the likelihood of a rate cut by the European Central Bank at its meeting on July 5.

The FTSE Eurofirst 300 index of top European companies gained 0.5 percent to 1040.47 points, adding to a 4.2 percent jump seen since Friday.

“If the ECB offers loud support this Thursday with a rate cut and a signal of more to follow in the face of lower growth and inflation, there may be enough fuel for a summer rally in stock markets,” said Bill O’Neill, EMEA Chief Investment Officer for Merrill Lynch Wealth Management.

The euro zone’s blue chip Euro STOXX 50 index has jumped 6.2 percent in the two last sessions after euro zone leaders surprised investors with the extent of the progress made at their recent summit in tackling the protracted debt crisis.

After gains on Wall Street on Monday and earlier across Asia, MSCI’s world equity index was up 0.3 percent at 314.3.22 for a gain of 3.7 percent since Friday.

Britain’s top share index, the FTSE 100 index, was another gainer ahead of the Bank of England’s policy setting meeting, also on Thursday, when it is expected to provide further economic stimulus measures to boost a flagging economy.

However, the UK third-largest bank, Barclays, bucked the trend falling 2.0 percent after its Chief Executive Bob Diamond quit over an interest rate-rigging scandal, becoming the highest-profile victim so far in a probe that spans a dozen major banks across the world.

Factories slow

The key reason for the gains in equity markets is a growing deceleration in manufacturing activity around the world, which has raised expectations central banks will have to respond.

This view gained momentum on Monday when data for June showed the giant U.S. manufacturing sector was on course for its first contraction in nearly three years.

A similar measure of factory activity in the euro area also held steady at its lowest level since June 2009, while joblessness across the region rose to a record high in May.

Many market players believe a weak U.S. jobs report on Friday could push the U.S. Federal Reserve into a third bout of quantitative easing (QE) - the policy of creating money to fund asset purchases that has lifted riskier assets such as shares and commodities in the past.

“We could see central banks on both sides of the Atlantic cutting (rates), which obviously markets would take positively,” said Jessica Ground, UK fund manager for Schroders.

ECB awaited

The ECB is widely expected to bolster the euro zone economy by cutting its main refinancing rate by 25 basis points to 0.75 percent, with some saying it may have go further and take more “non-standard” measures - such as reactivating its own bond-buying programme or offering banks fresh liquidity.

“We think if it’s just a rate cut, that would be a disappointment for markets because a rate cut would not do very much at all for the peripheral economies,” said Christian Schulz at Berenberg Bank.

The ECB calmed investors earlier this year by unleashing over 1 trillion euros into region’s banking system with twin 3-year funding operations, or LTROs.

And there are still plenty of analysts who see the ECB announcing just a small cut in rate this week while it waits to see how this money flows through to the real economy.

Australia’s central bank held its main cash rate steady at 3.5 percent on Tuesday, as it continues to gauge the effect of back-to-back rate cuts earlier this year.

China serves up gains

A surprise rise in activity in China’s services sector for June added to gains in commodity prices and resource-related assets already lifted by the monetary policy easing talk.

China’s service industry, which accounts for 43 percent of output in the world’s second largest economy, expanded at its fastest pace in three months last month, according to an official purchasing manager’s survey.

The potential for a rebound in demand for base metals from China, along with hopes its central bank could announce moves to boost liquidity in the banking sector, sent copper up 2.5 percent to six-week highs of $7,815 a tonne.

Brent crude was up $1.70 a barrel to just over $99 while U.S crude rose $1.16 to $84.91.

Gold gained half a percent to $1,605.36 an ounce on expectations central banks would ease monetary policy. The precious metal’s value increases when money supply is abundant and interest rates low.