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Stocks rally, bonds tumble as China manufacturing rebounds, inflation weighs

Kitco News

LONDON, March 1 (Reuters) - World stocks rebounded on Wednesday after China's manufacturing activity expanded at the fastest pace in more than a decade, while stronger-than-expected inflation numbers across the euro zone battered government bonds.

Inflation data from German regions, a day after February numbers showed price pressures surged more than expected across France and Spain, bolstered expectations that the European Central Bank will push interest rates higher and previously thought.

Germany's 2-year government bond yield , highly sensitive to changes in interest rate expectations, rose to its highest since October 2008 at around 3.60%, and was last up 8 basis points (bps) on the day. Bond yields rise as prices fall.

"The surprises in January inflation releases have challenged hopes for a smooth return to target inflation," said Bruno Schneller, a managing director at INVICO Asset Management.

Sticky inflation might compel central banks to raise rates further in order to prevent further economic damage, he said.

"Consequently, the risk of policy-driven recessions could rise," he added.

Two-year Treasury yields , a guide to short-term U.S. rate expectations, were close to four-month highs, but at 4.82%, are below a November peak around 4.88%.

The next flush of economic indicators is likely to be crucial as markets assess whether future rate hikes are sufficiently priced in now.

Meanwhile stock markets looked beyond Europe, cheered by numbers from China's factory sector, which grew in February at the fastest pace in more than a decade, in contrast to the rest of Asia where manufacturing growth stalled.

China's official manufacturing purchasing managers' index (PMI) rose to 52.6 last month from 50.1 in January and was well ahead of an analyst forecast for 50.5, giving investors hope that China's recovery can offset a global slowdown.

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) jumped 2.2% earlier to leave behind a two-month low.

The index provider's broader world stock measure (.MIWD00000PUS) last rose 0.5%, with Europe's STOXX 600 (.STOXX) up 0.3% by 1159 GMT, kicking off the month on steady ground following a solid start to the year.

Over the past several years markets have become used to cheap money and adapting to a new reality could be painful, said Russ Mould investment director at AJ Bell.

"That is where the challenge lies," said Mould, adding he was "scratching his head" about why stocks and bonds were spurred on by different stories on Wednesday.

U.S. stocks were expected to reverse a downward week with S&P futures up 0.3%.

In currency markets, the dollar's February gains seem to have run out of steam and European and Asia Pacific currencies advanced on the strength of the Chinese data.

The pound and euro were last up 0.2% and 0.9% against the dollar, respectively.

Oil slipped on Wednesday, giving up an earlier gain, as signs of ample supply and rising U.S. crude inventories countered expectations for higher demand arising from a jump in manufacturing in top crude importer China.

Brent crude futures were last down 0.6% at $82.91 a barrel.

Geopolitics also kept nerves elevated in the background.

Last week's U.S. President Joe Biden's visit to Kyiv and Russian President Vladimir Putin's abandonment of the last remaining nuclear arms control treaty with the U.S. signalled a hardening of positions.

China, which showed support for Russia by sending its top diplomat to Moscow last week, has issued a call for peace, though it has been met with scepticism and Washington has expressed concern in recent days that China could send arms to Russia.

"Should Beijing send Russia arms, it risks a rapid geopolitical breaking of the world economy," said Rabobank's research head, Jan Lambregts. "Markets have not even begun to contemplate what this might mean."

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