Better-Than-Expected U.S. Production Spurs Rally

World stock markets extended strong gains Monday after a U.S. manufacturing survey provided further evidence that the global economy may be poised for recovery in the second half of the year.

In Europe, the FTSE 100 index of leading British shares was up 76.72 points, or 1.7 percent, at 4,494.66 while France’s CAC-40 was up 82 points, or 2.5 percent, to 3,359.65 despite fears about the fate of a missing Air France flight from Brazil to Paris. Germany’s DAX surged 170.77 points, or 3.5 percent, to 5,111.59 though analysts said the gains may have been exaggerated by lighter volume due to a holiday.

On Wall Street, the Dow Jones industrial average was 175.15, or 2.1 percent, higher at 8,675.48 soon after the open while the broader Standard & Poor’s 500 index rose 20.13 points, or 2.2 percent, to 939.27.

The bright start to the week, particularly in commodity-related stocks, was sparked by surveys around the world showing that the manufacturing sector was on the mend if not quite in full recovery mode.

The monthly U.S. purchasing managers index — a broad gauge of business activity — from the Institute for Supply Management rose to 42.8 in May from April’s 40.1. Though any reading below 50 indicates contraction, the increase was higher than the 42 expected in the markets and echoed the findings earlier around the world.

In China, brokerage CLSA Asia-Pacific Markets said its monthly purchasing managers index — a broad gauge of activity — rose to 51.2 in May from April’s 50.1. The state-sanctioned China Federation of Logistics and Purchasing said its own PMI eased slightly to 53.1 from April’s 53.5 but still showed activity expanding — any reading above 50 indicates growth.

Meanwhile, data provider Markit found that its manufacturing purchasing managers’ index for 16 countries that use the euro was revised up to a seven month high of 40.7 in May from the previous estimate of 40.5, while the Chartered Institute of Purchasing and Supply said its index for Britain rose for the third month running to 45.4 in May from 43.1 in April.

“For the markets, the theme of investing in riskier assets continues and the economic data has been coming in slightly better than expectations,” said Neil Mackinnon, chief economist at ECU Group.

Economic news could well be the main driver this week, culminating in Friday’s closely-watched U.S. non-farm payrolls report for May where investors will be looking to see if the recent better than expected U.S. economic data is being translated into more modest job losses.

The European Central Bank and the Bank of England also announce their latest interest rate decisions on Thursday. Though they are expected to keep their benchmark rates at 1 percent and 0.5 percent respectively, investors will be interested to see what the two banks say about the economic outlook.

“The event risks increase dramatically this week with central bank action and macro figures high on the agenda,” said David Keeble, an analyst at Calyon Credit Agricole.

Despite a recent lull, stocks around the world have rallied strongly over the last few weeks, with some major indexes moving into positive territory for the year. The trigger for the gains has been better than expected economic news, particularly in the U.S., which has fueled an increase in appetite for risk on hopes that the global recession is receding. Stock markets usually start recovering between 6-9 months before an actual economic recovery emerges.

If this week’s economic data disappoint and the banks paint a gloomier picture than many are predicting, then stocks could suffer, analysts said.

Monday’s gains have come even though General Motors Corp. has filed for bankruptcy protection, the biggest industrial bankruptcy case in U.S. history.

Earlier in Asia, Japan’s Nikkei 225 stock average, which has surged 37 percent since early March, closed up 155.25 points, or 1.6 percent, to 9,677.75, while Hong Kong’s Hang Seng index shot up 4 percent to 18,888.59.

Elsewhere in Asia, China’s Shanghai benchmark surged 3.4 percent to 2,721.28 while South Korea’s Kospi rose 19.21 points, or 1.4 percent, to 1,415.10. And Australia’s index advanced 2 percent and Singapore’s market climbed 2.2 percent.

Crude prices extended recent gains to briefly rise above $68 a barrel. Benchmark crude for July delivery trade up $1.27 to $67.58 in electronic trading on the New York Mercantile Exchange.

In currencies, the dollar rose to 96.22 yen from 95.33 yen in late New York trading Friday. The euro rose to $1.4192 from $1.4152.

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AP Business Writer Stephen Wright in Bangkok contributed to this report.

6/1/2009 10:24 AM PAN PYLAS AP Business Writer LONDON