Shares, bonds rally as investors bank on endless stimulus

SYDNEY (Reuters) - Asian shares pushed higher on Thursday after a flood of soft economic data led investors to wager on a ceaseless fountain of stimulus from major central banks, sending bond yields tumbling across the globe.

An economic contraction in Japan, a shock fall in Chinese loans, a surprisingly dovish turn by the Bank of England and a sluggish reading on U.S. retail sales all combined to make any tightening in policy seem a very distant prospect.

Indeed, investors suspect further easing is in the cards with data on euro zone growth and inflation later Thursday expected to pressure the European Central Bank for more action.

Yields on Germany's two-year debt actually went negative, meaning investors were paying for the privilege of lending Berlin money.

"Risk-correlated assets have responded positively to weak activity data in the U.S., China, the euro area and Japan," summed up Barclays forex strategist Aroop Chatterjee. "Euro area inflation remains subdued, which could put pressure on the ECB."

But it is hardly alone.

"China's growth recovery remains fragile," he added. "More forceful policy easing such as interest rate cuts is likely needed for the government to achieve its growth target."

The Bank of Korea on Thursday cut its rates by a quarter point to 2.25 percent, the lowest since early November 2010.

The shift came after new Finance Minister Choi Kyung-hwan last month launched a series of stimulus measures to prop up faltering growth.

The thought of endless largesse helped take the sting out of the disappointing economic news and underpinned equities.

Japan's Topix <.TOPX> rose 0.5 percent, while the Australian market added <.AXJO> 0.7 percent. MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was up 0.3 percent.

On Wall Street the Dow <.DJI> ended Wednesday 0.55 percent firmer, while the S&P 500 <.SPX> added 0.67 percent and the Nasdaq <.IXIC> 1.02 percent.

Brazil was one of the few markets to lose ground as news that presidential candidate Eduardo Campos was killed in a plane crash knocked the Bovespa index <.BVSP> down 1.5 percent.

NO HIKES HERE

Bond investors were also enticed by the outlook for easy money as subdued U.S. retail sales led markets to again push back the day when the Federal Reserve might first raise rates.

Fed fund futures for June next year <0#FF:> closed at their highest in over two months at 99.75, implying a rate of just 0.25 percent.

Two-year U.S. Treasury yields dived to their lowest close in nine weeks at 0.4159 percent , rallying from a top of 0.59 percent in just 10 sessions.

Across the Atlantic, the Bank of England caused a major surprise by slashing its forecast for wage growth and saying higher rates hinged largely on an improved outlook for pay.

With traders abandoning bets for a near-term hike, yields on two-year gilts plunged 10 basis points to 0.719 percent, the biggest daily fall since late June 2013.

The pound dropped to its lowest in four months around $1.6680 . It also plumbed a near seven-week low at 80.20 pence per euro and slid 0.7 percent on the yen to 170.79 .

The setback for sterling helped the dollar index <.DXY> edge up to 81.649. The euro held steady at $1.3360 , though it could come under pressure if growth and inflation figures later in the day prove soft.

In commodity markets, worries about Chinese demand kept copper down at $6,880 a ton, after touching a seven-week trough under $6,874 .

Spot gold, in contrast, found support from the outlook for loose monetary policy and edged up to $1,311.11 an ounce .

Prices for Brent crude oil were off 50 cents at $103.78, after it hit a 13-month low of $102.37 a barrel. U.S. crude was down 28 cents at $97.31.

(Editing by Shri Navaratnam)

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