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Stocks recover as calm descends on markets
World markets start week firmly amid hopes that recent volatility has run its course for now
By The Associated Press

MILAN (AP) ' World stocks started the week solidly amid hopes that the recent sharp volatility in the markets may have run its course following a run of stronger than anticipated economic data.

Though concerns remain over the state of the global economy and Europe's debt crisis, many investors think the recent sell-off has been overdone and are snapping up potential bargains.

"Some stability appears to be returning to markets .... but businesses remain wary that the U.S. government isn't doing enough to arrest its massive budget deficit and that European governments aren't doing enough to avert financial contagion from infecting the banking system," said Sal Guatieri, an analyst at BMO Capital Markets.

The calmer mood has been helped by last Friday's better than expected U.S. retail sales figures for July and news earlier that Japan contracted by an annualized rate of 1.3 percent in the second quarter of the year after the impact of a devastating earthquake and tsunami. The consensus in the markets was that Japan's economy would have shrunk by at least double that rate.

In Europe, London's FTSE 100 was up 0.3 percent at 5,336, while Germany's DAX rose 0.6 percent to 6,036. The CAC-40 in France was 0.4 percent higher at 3,227.

Wall Street was poised for further gains ' Dow futures were up 0.3 percent at 11,280 while the broader Standard & Poor's 500 futures rose a similar rate to 1,180.

Figures showing a further easing in manufacturing activity around the New York region failed to excite investors too much.

Europe's debt crisis will also be in the spotlight this week, particularly on Tuesday when French leader Nicolas Sarkozy and German Chancellor Angela Merkel meet, and second-quarter eurozone growth figures are published.

"The Franco-German summit on Tuesday in Paris will be a major focus for financial markets this week, especially coming so shortly after what has been a very tumultuous week for France in financial markets," said Jan Dubsky, euro area economist at the Royal Bank of Scotland.

Of particular interest will be what the two leaders say about the viability of a eurobond as a potential solution to Europe's debt crisis, which has already seen three eurozone countries get bailed out. With a eurobond, the 17 countries that use the euro would jointly issue debt.

One of the reasons why Europe's debt crisis has flared up again is that the markets started fretting about the state of the public finances of Italy and Spain.

That prompted the European Central Bank a week ago to start intervening directly in the markets to support their bond prices. Figures later Monday will show how much the ECB splashed out in this bond-buying program, which has worked in getting both countries' borrowing costs down to manageable levels.

In return for directly buying Italian bonds, the ECB wanted more austerity from the government. Last week, Prime Minister Silvio Berlusconi announced euro45.5 billion ($64.8 billion) in emergency austerity measures.

The improving appetite for risk, evidenced by the more benign stock market conditions, was evident in currency markets too, with the euro up 0.8 percent at $1.4385.

And notably, the Swiss franc continued to fall on speculation that the Swiss National Bank will peg the currency to the euro. Swiss officials have hinted that further action could be taken, after liquidity measures, to correct the currency's "massive overvaluation" in recent trading. By mid afternoon, the euro was 0.7 percent higher on the day at 1.1275 francs.

Despite the speculation, BNP Paribas strategists said in a report that the Swiss franc "is susceptible to renewed strength if the markets do not receive some official signals of pending action by midweek."

In Asia, stock markets rose Monday as data showed the economy of earthquake-battered Japan shrank less than expected.

Japan's Nikkei 225 index closed up 1.4 percent at 9,086.41 while Hong Kong's Hang Seng index shot up 3.3 percent to 20,260.10.

Mainland Chinese shares gained for a fifth trading day on expectations the government announce new measures to support growth. The Shanghai Composite Index added 1.3 percent to 2,626.77 and the Shenzhen Composite Index rose 1.4 percent to 1,175.41.

In the oil markets, prices recovered alongside equities. The main New York contract was up 25 cents at $85.63 a barrel.


Pamela Sampson contributed from Bangkok.

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