China leads world stock advance as dollar rallies

LONDON — Chinese stocks rallied Friday as traders returned to their desks following a weeklong holiday, when the rest of the world’s major markets shot higher amid mounting optimism about the global economic recovery. European markets were mostly unchanged.

Meanwhile, the dollar garnered some support after U.S. Federal Reserve chairman Ben Bernanke spoke about the need — eventually — to raise interest rates to counter potential inflationary problems.

Shanghai’s main index climbed 132.29 points, or 4.8 percent, to 2,911.72, easily making the index the best performing in Asia. Elsewhere, Japan’s Nikkei index added 183.92 points, or 1.9 percent, to 10,016.39 while Hong Kong’s Hang Seng rose 6.54 points, or less than 0.1 percent, at 21,499.44.

In Europe, stocks were flat in morning trade, in line with expectations for Wall Street. The FTSE 100 index of leading British shares was up 1.66 points, or less than 0.1 percent, at 5,156.3 while Germany’s DAX fell 6.98, or 0.1 percent, at 5,709.56. The CAC-40 in France was 1.5 points, or less than 0.1 percent, lower at 3,805.31.

Despite the modest losses, Europe’s main markets remain well up over the week, with the FTSE and the DAX near 12-month highs. Solid economic data around the world and an encouraging start to the third-quarter U.S. earnings reporting season has helped stocks recover their poise after a few weeks of unremarkable progress.

The second quarter earnings season was generally better than expected and helped fuel a big rise in share prices in July and August. However, the forecast-busting earnings were largely due to cost cutting that are unlikely to be repeated.

Early signs are that firms are growing more optimistic about the business environment. Aluminum company Alcoa Inc., which kicked off this earnings season, forecast an 11 percent increase in worldwide aluminum demand, largely on the back of robust growth in China.

The earnings season in the U.S. goes up a gear next week and the big investment banks, Goldman Sachs Group Inc. and JP Morgan Chase & Co., will be the main focus of attention.

“They will surely beat expectations with a bit to spare,” said David Buik, markets analyst at BGC Partners.

With earnings statements few on the ground on Friday, U.S. stocks are expected to be fairly subdued. Dow futures were down 5 points, or 0.1 percent, at 9,742 while the broader Standard & Poor’s 500 futures fell 1 point to 1,062.80.

Elsewhere in Asia earlier, South Korea’s Kospi added 1.9 percent to 1,646.79 after its central bank left its key interest rate unchanged at a record low, saying it would stick to an “accommodative stance” for now. Korea is believed to be close to following Australia in raising rates, but the central bank said inflation does not appear to be a problem.

Singapore’s Straits Times Index was fractionally lower and Australia’s index fell 0.3 percent.

Oil prices fell to near $71 a barrel, giving up part of the previous day’s big gains, as the U.S. dollar rebounded. The November contract was down 46 cents at $71.23; it rose $2.12 to $71.69 on Thursday.

The dollar rose 0.9 percent to 89.21 yen while the euro fell 0.5 percent to $1.4721.

The U.S. currency recovered somewhat from recent losses after comments from U.S. Federal Reserve chairman Ben Bernanke about the need for a thought-out exit strategy to the extraordinary monetary measures the central bank has taken over the last year or two.

Though Bernanke said accommodative policies will likely be “warranted for an extended period,” he said “we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.”

Once the Fed starts raising rates, then investors will get a better return on the dollar. As a result, expectations that they may rise sooner than previously anticipated helped support the U.S. currency, which has been languishing near year-lows against the euro and the yen amid concerns about its future status as the world’s leading reserve currency.

Earlier this week, the Reserve Bank of Australia was the first leading central bank to raise interest rates in this cycle.

“The comments come as investors look for evidence that the policy tightening timetables of other central banks will be brought forward in response to the RBA’s unexpected rate hike this week,” said Gareth Berry, an analyst at UBS.

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AP Business Writer Joe McDonald in Beijing contributed to the report.