By Richard Hubbard
LONDON (Reuters) - A pick-up in Chinese economic activity lifted world shares back toward five-year highs on Thursday, though weaker-than-expected European growth pulled the euro off a two-year peak against the dollar.
Activity across China's vast factory sector reached a seven-month high this month, according to an HSBC survey, easing concerns about a slowdown in Chinese exports which would point to weakening global demand.
Mining stocks and oil gained on the data though shares in China <.CSI300> ended lower as domestic investors worried that a spike in short-term money rates engineered by the central bank could hurt growth going forward.
"What we're seeing is not much more than a stabilization of growth expectations in China. If that does gather momentum the key winners will be those countries that export to China," said Adam Cole, head of FX Research at RBC Capital Markets.
Across the 17-nation euro area a separate survey found business activity eased slightly in October after a pick-up in September, though it confirmed the region's economic recovery was taking root.
The Markit Purchasing Managers' survey (PMI) also revealed that growth in Europe's biggest economy, Germany, was the slowest in three months.
"It's a slow, uneven and fragile recovery," said Chris Williamson, chief economist at Markit.
Europe's broad FTSE Eurofirst 300 index (.FTEU3) was up 0.3 percent in early trading, reapproaching five-year highs touched this week before a selloff on Wednesday snapped a nine day winning streak. (.EU)
The index was supported by mining shares after the China data and by forecast-beating quarterly earnings from German car maker Daimler (DAIGn.DE), Swiss industrial group ABB (ABBN.VX) and Nordic banks among others.
The disappointing euro zone data had little impact on the region's bonds which were steady with German 10-year yields staying at 1.77 percent. (GVD/EUR)
MSCI's world equity index <.MIWD00000PUS> was up 0.1 percent. However, it was well below this week's peak reached after a below-forecast U.S. jobs report convinced many the Federal Reserve would maintain monetary stimulus at current levels into next year.
Rising expectations that the Fed would delay tapering its bond-buying activity has weighed broadly on the dollar, which was trading near a nine-month low against a basket of currencies Of at 79.236. (.DXY)
The single currency did touch a peak of $1.3824, its strongest since November 2011, before the slightly disappointing euro zone PMI number knocked it back.
"The markets are geared up for euro strength at the moment but people are very reluctant to go headlong into the currency, especially at these levels," said Simon Smith, chief economist at FXPro.
In the oil market, the positive economic news from China, the world's second-largest consumer, helped offset another rise in U.S. crude stockpiles that had depressed prices overnight.
Brent crude oil futures were up 37 cents to $108.16 a barrel, while U.S. crude gained 78 cents to $97.64.
Gold meanwhile was adding to its recent gains on the hopes the Federal Reserve will extend its bullion-friendly stimulus efforts. It was up $6.10 an ounce to trade at $1,337.84.
Although the precious metal has fallen about 20 percent this year it was back at a four-week high as the prospect of an extended flow of super-easy dollars, heightened concerns about inflation risk.
(Additional reporting by Jessica Mortimer; Editing by Susan Fenton)