* MSCI world equity index touches at 5-week high
* Yuan hits 5-year high as China allows more flexibility
* Commodities up on hopes for increased demand
By Manuela Badawy
NEW YORK, June 21 (Reuters) - World stocks surged to a
five-week high and oil and other commodities jumped on Monday
after China vowed to allow its exchange rate to become more
flexible, boosting confidence in the global economic recovery.
Spot yuan <CNY=CFXA> 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. []
The move spurred optimism that a stronger yuan would lift
China's purchasing power for foreign goods such as commodities,
a boon to the global economy given China's huge demand for raw
materials.
The Australian and New Zealand dollars, considered part of
the commodity bloc, rose to their highest levels in about a
month, and copper and energy prices surged on expectations of
increased appetite for natural resources in the world's
third-largest economy.
The ease on the currency peg is a move to allow China's
economy to be driven less by the export of goods abroad and
more by domestic consumer spending. The move came ahead of a
meeting next week of the Group of 20 leading industrialized and
developing economies, where global trade imbalances are
expected to be a key issue.
The surge in global equities on Monday was led by energy
and materials shares, which rose with the higher commodities
prices.
"It is a powerful story for equity markets," said Mike
Lenhoff, chief strategist at Brewin Dolphin.
"China's readiness for further exchange rate reform is just
what is needed. Together with interest rates on hold at the
major central banks, it provides another means of reflation for
the global economy."
U.S. stocks were propelled on by the long-term outlook for
sales at U.S. multinationals, as well as by gains in natural
resource shares.
"Companies that produce durable goods like Caterpillar will
benefit from this," said Randy Frederic, director of trading
and derivatives at Schwab Center for Financial Research in
Austin, Texas.
"The assumption is that the yuan maintains its increased
valuation (against) the dollar in the long-term, so Chinese
people will have the ability to purchase U.S. market goods."
The Dow Jones industrial average <> was up 65.53
points, or 0.63 percent, at 10,516.17. The Standard & Poor's
500 Index <.SPX> was up 5.39 points, or 0.48 percent, at
1,122.90. The Nasdaq Composite Index <> was up 4.72
points, or 0.20 percent, at 2,314.52.
Caterpillar Inc <CAT.N> gained 2.6 percent to $67.55, while
Freeport-McMoRan Copper & Gold Inc <FCX.N> jumped 6 percent to
$69.88. For a factbox []
The MSCI world equity index <.MIWD00000PUS> rose 1.1
percent, hitting its highest level since mid-May.
The FTSEurofirst 300 index <> rose for a ninth
straight session to close 1 percent higher at 1,055.38 points,
the highest close since early May, with basic resources stocks
the biggest gainers.
Emerging stocks <.MSCIEF> added 2.6 percent to a six-week
high, while emerging sovereign debt spreads <11EMJ> tightened 8
basis points to 303 bps, their narrowest in five weeks.
"It's a very large positive in the sense that the next
decade of global growth is probably going to be shaped by how
well the China consumer develops or doesn't, and obviously this
is a step to help that," said Mike O'Rourke, chief market
strategist at BTIG LLC in New York.
China is the world's second biggest energy consumer after
the United States and the world's biggest consumer of base
metals.
U.S. crude oil <CLc1> rose 1.4 percent to $78.30 a barrel,
while spot gold <XAU=> hit a record high of $1,264.90 an ounce
earlier but eased later in the trading day as investors took
profits.
Copper prices soared on China's pledge and raised hopes of
stronger demand growth from the world's largest consumer of
industrial metals. Benchmark lead <CMPB3> on the London Metal
Exchange touched $1,837.75 a tonne, its highest since May 28,
and tin <MSN> reached $18,250, matching the peak of May 28.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Full yuan coverage []
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
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
The single European currency initially extended last week's
recovery against the dollar, at one point rising to a one-month
high, though gains faded as the New York session got under
way.
The euro was last down 0.24 percent at $1.2353 <EUR=>.
The dollar was flat versus a basket of currencies <.DXY>
close to a one-month low largely because of the euro's rise
earlier in the trading day.
U.S. Treasuries fell, with benchmark 10-year U.S. Treasury
note <US10YT=RR> down 5/32, and with the yield at 3.2414
percent. The 2-year U.S. Treasury note <US2YT=RR> was down
1/32, with the yield at 0.7175 percent. The 30-year U.S.
Treasury bond <US30YT=RR> was down 8/32, with the yield at
4.1617 percent.
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 give it less need to
diversify its holdings into currencies like the euro.
(Additional reporting by Rodrigo Campos in New York; Editing
by Leslie Adler)
