* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
* FTSE hits all time high to lead European stocks
* Oil jumps over 2 percent as rally resumes
* Germany, French inflation lifts euro zone bond yields
By Marc Jones
LONDON, Jan 3 The dollar notched up its biggest
gain in three weeks, oil jumped to a 18-month high and a record
FTSE lifted European stocks to a one-year peak on Tuesday,
building on upbeat Chinese data to ensure a strong start to 2017
for global markets.
Metal prices and bond yields also advanced, as the fastest
factory output growth in China in almost six years,
the best in Britain in 2-1/2 years and firmer German and French
inflation provided confidence for the new year.
Britain's FTSE 100 wasted no time on its first day
of trade in 2017 as it hit a record high of 7,200 points while
Wall Street, where the Dow Jones is still eyeing 20,000
points, was also pointing to a higher open.
Oil was up 2.2 percent and with U.S. and European
bond yields also rising, all the signals pointed to the
"reflation" trade that dominated the latter stages of 2016 being
firmly back on.
The dollar obliged, racking up its best gain - 1.2
percent - since Dec. 15 against other top world currencies to
leave it just shy of a 14-year high.
"If you look at the state of the economy globally, things
are in pretty good shape," ABN Amro's Chief Investment Officer
Didier Duret said.
"It is not only a Trump rally, it is a cyclical rally," he
added, referring to the way markets took off after November's
U.S. election. "We still believe the dollar will continue its
rise and the euro will weaken, which can provide substantial
impetus for European earnings."
Italian banks were also back amongst Europe's top risers as
newly merged Banco BPM jumped 8 percent on its second
day of trading.
Commodity-linked stocks were hot as they cheered the
Chinese data and the rise in oil and metals prices, while
European government bond yields headed north
as German inflation hit a 3-year high.
Long-term inflation expectations in the 19 country euro
zone, measured by the five-year, five-year forward rate
, are now at their highest in more than a year and
close to the ECB's near 2 percent target, as it prepares to pare
back the pace of its mass money-printing scheme.
"Until just a few weeks ago, the general consensus was that
upside inflation risks (in Europe) were very limited," said DZ
Bank strategist Birgit Figge, pointing to the "significant
uplift" that now looked possible.
OIL ON BOIL
Oil prices were up more than 2 percent ahead of U.S. trading
as the China data fed a market already buoyed by hopes a deal
late last year between the top oil producing nations will
tighten global supply glut.
Crude was the world's best-performing major asset class in
2016, with a gain of around 50 percent and global benchmarks
Brent and U.S. WTI were last at just over $58 a
barrel and just under $55 a barrel respectively.
"Markets will be looking for anecdotal evidence for
production cuts," Ric Spooner, chief market analyst at CMC
"The most likely scenario is OPEC and non-OPEC member
countries will be committed to the deal, especially in early
The oil surge was expected to help Wall Street when it
reopens, while data on tap includes the ISM Manufacturing
Purchasing Manufacturer's index (PMI) which is expected to have
edged up to 53.6 in December.
Back in Europe, the pick up in Germany and French inflation
had come on the heels of data on Monday showing manufacturers
ramped up activity at the fastest pace in more than five years
The positive numbers failed to shake the euro out
of its doldrums, however, with the common currency down 0.7
percent at $1.0384 as gold also sagged.
Overnight in Asia, MSCI's broadest index of Asia-Pacific
shares rose 0.6 percent as most regional markets
reopened after the New Year holiday although Japan's Nikkei was
Australian shares were the best performers, closing
up 1.2 percent. The Aussie dollar also gained, while in
China, both the CSI 300 index and the Shanghai
Composite climbed 1 percent having lost over 11 percent
Investors were also keeping an eye on the Chinese yuan after
the central bank nearly doubled the number of currencies in a
basket used to set the renminbi's value to 24 from 13, including
the Korean won, the South African rand and Mexican peso.
Regulators also said they were stepping up scrutiny of
individuals' currency purchases and would strengthen punishment
for illegal outflows, although the $50,000 annual individual
quota will remain unchanged..
"A year ago, the Chinese markets kept everyone on their
toes," said Jingyi Pan, market strategist at IG in Singapore,
said referring to market turmoil that engulfed investors.
"I don't think that we will see a repeat given that the
global economy has a better foothold,"
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
MSCI world equity index, which tracks shares
in 46 countries,
MSCI's main European Index
European stocks or the broader Euro STOXX 600
U.S. crude oil, Brent crude futures
German Bund futures
The dollar against a basket of six major currencies,
(weighted geometric mean of the dollar's value compared with 6
other major currencies which are: the euro at 57.6
percent weight, Japanese yen 13.6 percent, Pound sterling
11.9 percent, Canadian dollar 9.1 percent weight,
Swedish krona 4.2 percent and Swiss franc 3.6
(Additional reporting by John Geddie and Christopher Johnson in
London; Editing by Alison Williams)