By Emelia Sithole-Matarise
LONDON (Reuters) - European shares rallied on Thursday as calm returned to global markets after China's central bank said there was no basis for further depreciation of its yuan currency following a sharp devaluation this week.
U.S. stock futures were up 0.3 percent, with shares having recouped a lot of their falls in the previous session already. The global rally in equities started on Wall Street in late trade on Wednesday, with major indexes ending roughly flat after falling in early trade.
The perkier mood in riskier assets soured investor appetite for safe-haven government bonds, which had benefited from a sharp sell-off in equity and commodity markets prompted by the devaluation that saw the yuan slide around 4 percent.
The People's Bank of China (PBOC) said there was no basis for more yuan depreciation in light of strong economic fundamentals, even though the yuan dropped for the third straight day.
The PBOC set its guidance rate at 6.4010 per dollar prior to the market opening, weaker than the previous fix of 6.3306. The gap between the guidance rate and the traded spot market rate narrowed sharply as banking sources said the PBOC had stepped up intervention in a bid to stabilise prices.
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Still, traders remained cautious. Sources told Reuters some powerful voices in the government were pushing for an even deeper devaluation to help China's struggling exporters.
PBOC Vice-Governor Yi Gang dismissed such talk as groundless, but some in the market still expected that China would let the yuan slide further in the face of weakness in the economy.
"Investors have pounced on those reassurances from China to push the markets back up a bit. They're taking the Chinese central bank at its word, but I'm still taking those comments with a pinch of salt," said Hantec Markets' analyst Richard Perry.
The pan-European FTSEurofirst index of leading 300 blue-chips rose 1.7 percent to 1,543.23, having fallen as much as 4 percent this week.
The MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.3 percent.
U.S. FED FOCUS
The recovery in equities dimmed the allure of safe-haven government debt, pushing up U.S. and European bond yields.
German 10-year bond yields were 3 basis points higher at 0.63 percent while benchmark U.S. 10-year yields were 4 bps up at 2.17 percent in European trade, following a lacklustre auction on Wednesday.
The dollar, which had also suffered as investors pared back bets that the U.S. Federal Reserve's long-awaited interest rate hike would come as early as its Sept. 16-17 meeting, rebounded on Thursday.
The dollar index was up 0.3 percent at 96.558 recoiling from a one-month low of 95.926 hit on Wednesday with focus also on U.S. retail sales data due at 1230 GMT for further hints on the Fed rate outlook.
"The U.S. clearly needs to watch the global economy and China, but ultimately, if we get a very strong release today, market expectations for a September interest rate hike will probably bounce right back," said Rabobank currency strategist Jane Foley.
Against the safe-haven yen, the dollar also rose 0.3 percent to 124.51, bouncing off a two-month high of 125.28 yen set on Wednesday.
The euro edged down about 0.4 percent at $1.1114 after scaling a one-month peak of $1.1215 on Wednesday, helped by the unwinding of euro-funded carry trades in the yuan and other emerging market currencies.
In commodities trading, spot gold was down about 0.7 percent at $1,117.80 an ounce after logging its fifth straight session of gains.
Crude oil futures extended gains made on lower U.S. crude stockpiles, but remained not far from six-year lows plumbed this week on fears that China's weaker currency would hit its imports. U.S. crude was up about 0.3 percent at $43.43 a barrel, while Brent rose back above $50 a barrel, adding about 1.2 percent to $50.23.
(Additional reporting by Sudip Kar-Gupta and Jemima Kelly in London; Editing by Kevin Liffey and Raissa Kasolowsky)