By Dhara Ranasinghe
LONDON (Reuters) - World stocks hovered near record highs on Monday and were set to end August with five consecutive months of gains, as investors bet on central banks keeping up the policy punchbowl for years to come.
An upbeat reading on China's service sector added to the positive mood, with MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) touching its highest since March 2018.
News that French water and waste firm Veolia hopes to buy a near 30% stake in smaller peer Suez for 2.9 billion euros boosted European markets (STOXX), with bourses in Paris (FCHI), Frankfurt (GDAXI) and Milan <.FTMIIB> up 0.5-0.9%.
London was closed for a public holiday, while U.S. stock futures pointed to a positive open for Wall Street (ESc1) (1YMc1).
That left MSCI's world equity index (MIWD00000PUS) near record high levels. It has risen over 6% in August, set for its fifth straight month of gains.
Massive monetary and fiscal stimulus has bolstered stock markets in recent months, overpowering concern about the outlook for a world economy battered by the coronavirus.
Fed Chair Jerome Powell boosted stock markets last week by committing to keep inflation at 2% on average, allowing prices to run hotter to balance periods when they undershot.
The risk of higher inflation in the future, assuming the Fed can get it there, was enough to push up longer-term Treasury yields and sharply steepen the yield curve.
Yields on 30-year bonds (US30YT=RR) jumped almost 16 basis points last week and were last at 1.50%, 137 basis points above the two-year yield. The spread was now approaching the June gap of 146 basis points, the largest since late 2017.
"We know now the Fed is behind inflation and will be less strict than before, so it would be logical to see higher yields," said Eric Vanraes, fixed income portfolio manager at Eric Sturdza Investments in Geneva.
"But at the same time, we are in a tough situation regarding the economy and the Fed cannot allow a huge steepening of the curve, otherwise its efforts to fight the crisis would have been destroyed," he said.
"At some point, I think we will see a correction in equities but not a collapse, and that would be normal and good news for the market because equity levels are too high and disconnected to the economic reality and earnings."
A host of Federal Reserve officials are set to speak this week, kicking off with Vice Chair Richard Clarida later Monday.
Tokyo's Nikkei (N225) closed up more than 1%, buoyed by news Warren Buffett's Berkshire Hathaway (N:BRKa) had bought more than 5% stakes in each of the five leading Japanese trading companies.
Prime Minister Shinzo Abe's resignation on Friday had hurt shares on concern about future fiscal and monetary stimulus policies. Such worries were allayed somewhat by news Chief Cabinet Secretary Yoshihide Suga, a close ally of Abe, would join the race to succeed his boss. A slimmed-down leadership contest is likely around Sept. 14.
DOLLAR RECOVERY
The dollar firmed against its peers but was set for its fourth straight month of losses.
The dollar index rose 0.26% to 92.426 (=USD), nudging off recent two-year lows. It was 0.5% firmer at 105.87 yen
The Fed's shift to an average inflation target was likely to continue to weigh on the greenback, analysts said.
"Even if U.S. central bankers are likely to be pleased about the interpretation of their measures, it is not good news for the dollar," Commerzbank (DE:CBKG) analysts said in a note.
Elsewhere, the dollar rebound weighed on gold, which fell 0.3% to at $1,957 an ounce
Brent crude oil touched its highest in five months, underpinned by a 30% cut in Abu Dhabi crude supplies and encouraging Chinese data.
Brent crude futures (LCOc1) rose to $46.46 a barrel, the highest since March, and was last up 1.4%. U.S. West Texas Intermediate crude (CLc1) was at $43.35 a barrel, up 38 cents, or 0.9%.