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European rate cut hopes fuel market rally

Pan Pylas, AP Business Writer

People walk by an electronic stock board of a securities firm showing Japan's benchmark Nikkei stock exchange surged 261.88 to 1,578.36 in Tokyo Monday, April 22, 2013. Asian markets traded higher Monday, with Tokyo stock markets heading close to a five-year high after a meeting of global finance leaders lent support to Japan's aggressive monetary policy. The Nikkei index rose after a statement by finance ministers and central bank presidents from the world's biggest economies appeared to give its blessing to aggressive credit-easing moves pushed by Japanese Prime Minister Shinzo Abe, saying they were intended to stop prolonged deflation and support domestic demand. (AP Photo/Koji Sasahara)

LONDON (AP) -- Hopes that the European Central Bank will cut interest rates next month to support a fading economy fueled a rally in stock markets on Tuesday.

Investors, particularly in Europe, rushed to buy stocks and bonds on expectations that the ECB will opt to cut its main interest rate to a record low of 0.50 percent at its meeting next Thursday from the current 0.75 percent.

The speculation was triggered by a survey into manufacturing activity among the 17 European Union countries that use the euro. The PMI survey from Markit fell another 0.3 points in April to 46.5 — anything below 50 indicates a contraction.

In particular, the survey showed that it wasn't just the weaker, indebted countries that are struggling. Germany, Europe's biggest economy and its export powerhouse, weakened too.

"This is now going to prompt talk again of an ECB rate cut, given that Bundesbank head, Jens Weidmann, conceded recently that a rate cut would be considered if we see further worsening in the economic data," said Craig Erlam, market analyst at Alpari. The Bundesbank is Germany's central bank.

In Europe, Germany's DAX rallied 2.4 percent to close at 7,658.21 while the CAC-40 in France rose 3.6 percent to 3,783.05. The FTSE 100 index of leading British shares rose 2 percent to 6,406.12.

The market optimism helped lower interest rates on government bonds for financially weak countries like Italy and Spain. The yield on Italy's benchmark 10-year bond fell a further 0.12 percentage points to 3.91 percent while Spain's fell 0.24 percentage points to 4.26 percent. Neither country's borrowing rates have been this low since late 2010.

Wall Street was solid too, with the Dow Jones industrial average up 1 percent at 14,716, while the broader S&P 500 index rose 1.1 percent to 1,579.18.

A raft of earnings helped shore up the U.S. open. DuPont, the chemical maker, reported first-quarter profits that more than doubled as its agricultural unit did brisk business. Travelers insurance and Coach soared after strong reports.

The main point of interest on the earnings front will be when Apple reports after the markets close. The company has seen its share price take a battering over the past few months amid mounting concerns over its product line and tough competition.

"With the stock nearly 50 percent off all-time highs, the question is how much more scope is there on the downside," said Fawad Razaqzada, market strategist at GFT Markets.

Earlier, Chinese shares underperformed after a downbeat manufacturing survey renewed concerns over the world's second-largest economy.

A preliminary survey by HSBC Corp. found that China's manufacturing growth slowed in April, in a further sign that the economy is slowing.

HSBC's monthly purchasing managers' index — a gauge of business activity — fell to a worse-than-expected 50.5 from March's 51.6 on a 100-point scale. That means it's growing but only just — anything below 50 would have signaled a contraction in activity.

"Just as in 2012, Chinese growth is failing to live up to the market's high expectations," said Rebecca O'Keeffe, head of investment at Interactive Investor.

The survey hit Chinese shares particularly hard, with the country's Shanghai Composite Index tumbling 2.6 percent to 2,184.54 and the Shenzhen Composite Index falling 2.7 percent to 923.42. Hong Kong's Hang Seng shed 1.1 percent to 21,806.61.

Elsewhere in Asia, Japan's benchmark Nikkei index slipped as the yen gained ground against the dollar. The Nikkei 225 in Tokyo fell 0.3 percent to close at 13,529.65.

In currency markets, the dollar recovered to rise 0.2 percent against the Japanese yen, to 99.40 yen. The euro fell 0.4 percent against the dollar, to $1.3011.

Oil prices were also depressed following the disappointing economic data, with the benchmark New York rate down 3 cents at $89.16 a barrel.