Stocks at 4-1/2 week high as risk back in favor

LONDON (Reuters) - World stocks hit a 4-1/2 week high on Monday and oil rose as investors grew confident over the prospects for the global economy after Greece avoided an early default on its sovereign debt and on signs China's economy is unlikely to make a hard landing.

Shanghai stocks hit a six-week high after data last week showed Chinese manufacturing growth moderated in June, raising expectations that the economy may not be heading into a sharp slowdown despite monetary policy tightening.

Over the weekend, euro zone finance ministers approved a 12 billion euro installment of aid for Greece and said the details of a second aid package would be finalized by mid-September.

But the euro paired its gains on Monday after ratings agency Standard & Poor's said a debt rollover plan being considered for Greece may still put the country into "selective default.

"Greece was always going to be a sticking point and this issue of debt rollover and rating agencies views will be something that the market will keep an eye out for," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

The MSCI world equity index <.MIWD00000PUS> rose 0.3 percent to hit its highest since early June.

The benchmark index rose more than 5 percent last week, its biggest weekly gain since July 2010.

European stocks <.FTEU3> ticked higher while emerging stocks <.MSCIEF> rose nearly 1 percent, helped by Shanghai stocks <.SSEC> which hit a six-week peak. U.S. markets are closed for the Independence Day holiday.

"There has been a significant multiple contraction in PE (price-earnings) terms which means that (China) is emblematic of the overall cheapness of the region," said Jonathan Garner, head of global emerging markets strategy at Morgan Stanley.

"So we do expect China to do better both in absolute and relative terms in the second half."

Fund tracker EPFR's data showed investors piled back into emerging market equity funds in the week to June 29 as hopes that Greece would avoid imminent default encouraged risk taking.

Inflows into global emerging market funds tracked by EPFR hit a 12-week high during the week, following three straight weeks of outflows.

U.S. crude oil rose 0.2 percent to $95.14 a barrel.

The euro fell 0.1 percent to $1.4523 after S&P poured cold water on the euro's rally, which has also drawn support from expectations that the European Central Bank will raise interest rates at its policy meeting later this week.

Bund futures rose 30 ticks.

The dollar <.DXY> fell 0.1 percent against a basket of major currencies.

Improved appetite for risk and the end of the Federal Reserve's bond-buying program reduced demand for U.S. Treasury bonds, with yields on 10-year notes settling at 3.18 percent, near its highest in almost two months and adding to a weekly rise of more than 30 basis points.

(Additional reporting by Anirban Nag; Editing by Hugh Lawson)

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