Rally on China outlook; U.S., Germany data help

By Barani Krishnan
NEW YORK (Reuters) - Stocks and commodity markets rallied on Tuesday, helped by improved investor sentiment on the economic outlook in China, the United States and Germany, although persistent worries over the euro zone debt crisis limited some gains.
Equities and commodities shook off a downgrade of the euro zone's EFSF rescue fund on Monday from U.S. rating agency Standard & Poor's, a few days after S&P cut ratings on several European countries, including France. But markets have been known to shift on bad news out of Europe.
Investors were watching Greece's talks on restructuring its debt to avoid default, though they were at an impasse.
Shares on Wall Street rose as much as 1 percent before paring gains as the market reopened after a long weekend extended by Monday's Martin Luther King Day U.S. holiday.
European equities finished up nearly 1 percent, hitting 5-1/2 month highs. Global stocks also gained about 1 percent.
Oil and copper prices rose between 1 and 3 percent as the positive sentiment over global growth coincided with news of potential supply issues and geopolitical tensions that heightened bullish fundamentals for those commodities. Gold hit 5-week highs as the dollar fell for the first time in three sessions against the euro.
Much of the gains were fueled by speculation that China may try to boost growth in the near term by tweaking its monetary policy after the country's economy expanded at its weakest pace in 2-1/2 years in the latest quarter.
"The bad news is really good news in China, since if they are slowing more than expected, then there's an expectation for further stimulus," said Matt King, chief investment officer at Bell Investment Advisors in Oakland, California. "We're seeing a clear shift from risk aversion with the lack of reaction to Europe, and the market has likely seen a bottom."
Around 2 p.m. EST (1900 GMT), the Dow Jones industrial average was up 98.20 points, or 0.79 percent, at 12,520.26. The Standard & Poor's 500 Index was up 9.28 points, or 0.72 percent, at 1,298.37. The Nasdaq Composite Index was up 27.32 points, or 1.01 percent, at 2,737.99.
Wall Street's financial stocks advanced after mixed earnings reports from major banks. Wells Fargo & Co was up nearly 2 percent at $30.16 after its quarterly profit topped expectations, offsetting an 11 percent profit drop for Citigroup Inc, which lost almost 6 percent to $28.93.
The KBW Bank index was off 0.2 percent, having risen more than 10 percent for the year.
A gauge of manufacturing in New York State showed growth picked up in January, rising to the highest level in nine months as new orders and employment improved, the New York Federal Reserve said in a report.
German investor sentiment also posted its biggest-ever monthly improvement in January, helped by recent upbeat data and hopes for the European Central Bank's efforts to ease the region's debt problems.
The improving German ZEW investor sentiment index, while encouraging, remained in negative territory, still indicating tough times ahead for the euro zone's largest economy, economists said.
"The index is still consistent with a majority of investors expecting economic conditions to deteriorate in future," said Ben May of Capital Economics.
The brightening economic news gave investors encouragement to move into riskier assets, lifting the euro and causing the U.S. dollar to drop against a range of currencies, including the Australian and New Zealand dollars. U.S. Treasuries prices slipped.
The euro was near its session high of $1.2800, a 0.6 percent gain on the day, and well up from a 17-month low of $1.2624 hit last week.
Sentiment also got a lift from data showing euro zone consumer prices fell more than expected in December, the start of a retreat from a November peak that could give the European Central Bank more room to cut interest rates as the economy struggles with recession.
The pan-European FTSEurofirst 300 index of top shares was up 0.85 percent, touching its highest level since August 2011. Gains were led by car makers and mining companies.
The MSCI world equity index gained nearly 1.2 percent after rising in Asian trade on the Chinese data. (Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com * BridgeStation: view story .134 For more information on Top News: http://topnews.reuters.com)
(Reporting by Barani Krishnan; Additional reporting by Ryan Vlastelica in New York, and Richard Hubbard and Anirban Nag in London; Editing by Dan Grebler)