By Marc Jones
LONDON (Reuters) - Reassuring Chinese factory data and another record high for Wall Street lifted world stocks and commodities on Monday, as markets waited to see how far the European Central Bank will go with policy easing plans this week.
The euro fell against the dollar, as subdued inflation readings in Germany and slower-than-expected manufacturing growth in the euro zone piled pressure on the ECB to act aggressively when it meets on Thursday.
Shares and commodities rose globally however as a rebound in Chinese manufacturing data helped soothe jitters about its economy following a wobble in the early months of this year.
Germany's DAX stock index closed in on 10,000 points for the first time, while gains elsewhere in Europe and a 2-percent jump for Tokyo's Nikkei left MSCI's world index edging to its own all-time high.
Futures prices pointed to the momentum just about holding for the start of U.S. trading, where the S&P 500 and Dow Jones Industrial both begin what will be a busy week.
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U.S. jobs data comes on Friday, but the main event will be the ECB's meeting on Thursday after weeks of frenzied speculation about rate cuts and other policy measures.
Like many, Societe Generale expects the central bank to cut rates and start charging banks that deposit cash with it, but unlike most, it also expects a far more aggressive 300 billion euro ($400 billion) Asset Backed Securities (ABS) purchase programme to be announced.
"We are expecting quite a slew of measures from the ECB," Societe Generale FX strategist Alvin Tan said.
"In our view all the rate cuts are priced in, even a negative deposit rate, but an asset purchase programme is probably not, so that would weaken the euro," he said.
The euro fell 0.2 percent to hit $1.3595 in the European session, not far from a three-month low of $1.3586 touched on Thursday. It also fell against sterling to 81.15 pence, with diverging monetary policy outlooks between the ECB and the Bank of England underpinning the pound.
RATE EXPECTATIONS
Though the U.S. Federal Reserve, Bank of England and Bank of Japan have long been using near-zero interest rates, the ECB is expected to go a step further and bring in a "negative deposit rate" by which it would charge banks who hoard spare cash.
Extra pressure for the ECB to act aggressively came from German annual inflation data, which showed a slowdown to its weakest rate in nearly four years in May.
European bonds continued to perform strongly and in Asia, the positive sentiment spilling over from China helped the Nikkei and saw Australian shares add 0.3 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan was little changed. Greater China markets were closed on Monday for a holiday.
The dollar was broadly stronger. It edged up 0.2 percent to 102.12 yen thanks in part to slightly higher U.S. Treasury yields and as it rode momentum from Friday's record close for the S&P 500.
"With market participants unwilling to be brave enough to take against-consensus euro long positions ahead of the (ECB)meeting, and the potential for an upside surprise in U.S. data, we expect euro/dollar to remain under pressure," ING currency strategist Petr Krpata said.
FINE CHINA
The robust China PMI reading also lifted base metals by lifting demand prospects for the world's second biggest economy, and supported emerging market currencies and stocks.
China's factory activity expanded at the fastest pace in five months in May, official data showed on Sunday, reinforcing views that its economy is regaining traction following support from Beijing.
Three-month copper on the London Metal Exchange climbed 1.2 percent to $6,925 a tonne. The metal gained 3.1 percent in May, its biggest monthly advance since December.
With risk appetite strong, safe-haven gold slid for a fifth straight session. Spot gold was at $1,246 an ounce, not far from the four-month low of $1,241.99 hit on Friday. Oil also slipped as the stronger dollar weighed.
"It's certainly a good sign to see the PMI starting to pick up, which suggests that the Chinese fine-tuning of policies is starting to gain a bit of traction which is a positive for industrial commodities," National Australia Bank analyst James Glenn said.
(Additional reporting by Shinichi Saoshiro in Tokyo and Anirban Nag in London; Editing by Louise Ireland)