* Focus turns to Fed stimulus prospects after government
* China Q3 growth quickens to 7.8 pct yr/yr
* World shares at 5-year high; European, Asian stocks add to
* Euro hits 8-1/2-month high vs dollar
* Gold heads for best week in two months
By Marc Jones
LONDON, Oct 18 (Reuters) - Expectations the Federal Reserve
will keep its stimulus in place for longer following the
confidence-sapping U.S. fiscal stalemate pushed world shares to
a five-year high and the dollar to an eight-month low on Friday.
An acceleration in China's giant economy provided a further
boost for stock markets, as well as for commodities such as oil
and copper, as the prospect of an extended spell of super-easy
money and improving growth buoyed investors.
Wall Street was expected to add around 0.2 percent to
Thursday's record close for the S&P 500 when trading
reopens, with analysts already digesting results from two of its
big fish, General Electric and Morgan Stanley.
European shares had stretched their morning gains
to 0.4 percent, with broadly even climbs for most of the
region's major bourses leaving them hovering at their highest
since mid-2008 after a weekly rise of 1.8 percent.
As a curtain fell on the U.S. debt drama, bets were laid on
how much the likely hit to growth would cause the Federal
Reserve to delay cutting back its stimulus - supporting riskier
assets but weighing on the dollar.
"The debate on the timing of QE tapering by the Fed is
quickly moving to whether it will be Q1 2014 or Q2," said Derek
Halpenny, European head of global markets research for Bank of
"The dollar has been left vulnerable by this uncertainty
especially in circumstances of growth stabilising in China."
Traders were continuing to sell it against a broad basket of
currencies from advanced and emerging economies as U.S. trading
gathered momentum, leaving the dollar index at 79.580.
The knock-on effect for Europe was a stronger euro
and pound. The euro zone's shared currency hit an 8-1/2
month high of $1.3694 as its recent strong run following signs
of a pick-up in the bloc continued.
"The euro has several factors that are certainly
beneficial," said Vasileios Gkionakis, global head of FX
Strategy for UniCredit. "The recovery is on track and next week
we have the new PMI figures which should support that view.
"I think we are also seeing central banks looking to
diversify some of their dollar holdings into euros and on top of
that at the last ECB press conference Mario Draghi didn't show
any real concern about the strength of the euro."
Investors were also relieved by data showing China's economy
grew 7.8 percent in the third quarter, its fastest pace this
year and meeting expectations, as firmer foreign and domestic
demand lifted factory output and retail sales.
China's CSI300 index climbed 0.7 percent, while
Australian shares jumped to their highest level since
June 2008. Australian exports are closely linked to China's
Shen Jianguang, chief China economist with Mizuho Securities
in Hong Kong, said the question regarding China was whether "the
current recovery is sustainable."
And though there was broad relief that the budget clashes in
Washington were over for now, investors were also retaining a
sense of caution following the last-minute deal.
While the deal pulled the world's largest economy back from
an historic debt default, it only funds the government until
Jan. 15 and raises the borrowing limit through to Feb. 7,
meaning another showdown could be on the cards.
"It (this week's deal) is positive in the fact we have
avoided a default but overall its not positive at all because we
still have a complete deadlock between the two parties," said
Philip Marey, U.S. focused economist at Rabobank.
"It will be January before we know it and we could see
another game of chicken."
U.S. GROWTH HIT, PORTUGAL LAGS
Markets are also positioning for a deluge of delayed U.S.
economic data over the next week.
A simple estimate suggested the direct and indirect impact
of this month's shutdown would weigh on annualised
fourth-quarter gross domestic product growth by 0.4 percentage
point, analysts at Morgan Stanley wrote in a note to clients.
German Bunds were on course for a steady end to a
week of hefty gains, while in the euro zone periphery only
Portugal was in the red along with its main share market
as its debt concerns remained prominent.
Benchmark 10-year U.S. Treasuries were trading
with a yield of 2.5504 percent ahead of the start of U.S.
trading, a two-week low. Yields move inversely to prices.
In commodity markets, China's stronger growth helped copper
climb 0.6 percent to 7,273 a tonne and Brent futures
back above $110 a barrel after a build-up of U.S. crude
stocks pushed oil prices down overnight.
Gold took a breather after rallying almost 3 percent
overnight - its biggest one-day rise in a month - as the dollar
weakened. It was steady at about $1,316 an ounce and not far off
a more-than one-week high reached on Thursday.