Euro, global stocks rise on China investment denial

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The euro and global stock markets surged higher on Thursday, bolstered by China's knock-down of a report saying it was looking to cut its holdings of euro zone sovereign debt.

The People's Bank of China's assertion that Europe is a key investment market for its foreign exchange reserves helped lift the euro from near four year lows. The central bank called the Financial Times report on Wednesday groundless.

"The fact that they came out with a statement today suggesting they're not going to sell the euro doesn't mean that they're not concerned. But they're looking at the euro from a long-term perspective and the base-case scenario is that the euro zone is not going to crack," said David Watt, senior currency strategist, at RBC Capital Markets in Toronto.

Commodity prices rose as the dollar fell, with the added benefit of improving US oil demand and a drop in crude stockpiles. Gold rose slightly.

US and European stock markets extended gains while government debt prices fell as risk appetite favored equities. Bargain hunters picked through the beaten-down market felled by fears Europe's debt crisis could spark a credit crunch and undermine the global economic recovery.

"The market is bouncing off oversold, but I think the big catalyst this morning is comments coming out of China that tempered concerns about the Chinese government possibly trimming back its USD 600 billion plus of euro zone bond holdings," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, New York.

In late morning in New York, the Dow Jones industrial average was up 219.99 points, or 2.21 %, at 10,194.44. The Standard & Poor's 500 Index was up 26.89 points, or 2.52 %, at 1,094.84. The Nasdaq Composite Index was up 63.06 points, or 2.87 %, at 2,258.94.

Equity markets shrugged off a report showing the US economy grew at a slower pace than previously estimated in the first quarter as business investment slackened.

Heading into the close of European trade, the pan-European FTSEurofirst 300 index rose 2.76 % to 998.82, its best level in a week. However, the index remains down around 10 % from a mid-April peak on worries about Europe's debt crisis.

MSCI's all-country world stock index rose 2.52 %.

A Reuters poll out Thursday showed institutional investors held onto their equities exposure more than might have been thought in May, given extreme volatility on financial markets, but also put more money in safe-haven cash.

Euro gains

The euro rose 0.71 % at USD 1.2253 while the dollar fell against a basket of major trading-partner currencies, with the US dollar index down 0.32 % at 86.838.

China has been trying to diversify its currency reserves to reduce the dollar's dominance in favor of the euro and yen to curb risks.