While you were sleeping: China sparks global rally

Shares on both sides of the Atlantic moved higher, triggered in part by a late surge in Chinese equities, amid optimism China's government will act to support its flagging economy.

On Wall Street. the Dow Jones industrial average rose 390.30 points, or 2.4%, to 16,492.68, its biggest one-day percentage and point gain in almost two weeks.

The Standard & Poor's 500 Index climbed 2.5%, while the Nasdaq Composite Index added 2.7%. On Monday, US markets were closed for the Labor Day holiday.

Gains in shares of General Electric and those of Wal-Mart, up 4% and 3.9% respectively, led the Dow higher. All 30 stocks in the Dow rose.

In Asian markets, China's Shanghai Composite Index closed 2.9% higher and fuelled a surge in Europe, where new figures showed growth was stronger than previously estimated.

In Europe, the Stoxx 600 Index ended the session with a 1.2% increase from the previous close. Germany’s DAX climbed 1.6%, France’s CAC-40 advanced 1.1% and the UK’s FTSE 100 gained 1.2%.

US Treasurys fell, lifting yields on the 10-year note seven basis points higher to 2.19%.

"Concerns about a slowdown [in China] are still there but now the market thinks the Chinese government will provide more support," John Plassard, senior equity sales trader at Mirabaud Securities in Geneva, told Bloomberg.

"Investors are also being forced back into equities because even after the recent swings there aren't any other options that will give the type of returns that equities do," Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago, told Reuters.

Investors are repositioning before next week's meeting of US Federal Reserve policy makers. After last Friday's US government jobs data, futures market traders predicted about a 20% chance the Fed will lift rates, down from about 30% before the jobs report, according to Reuters.

"If it were not for this financial market turmoil or these lower oil prices, the Fed would certainly raise rates within this year," Tomohisa Fujiki, the head of interest-rate strategy for Japan at BNP Paribas in Tokyo, told Bloomberg. "The market's view on a rate hike is quite mixed right now, just like the views we're hearing from FOMC members."

There was good news on the eurozone economy. A Eurostat report showed euro-zone gross domestic product grew more than originally estimated in the second quarter, expanding 0.4% in the second quarter from the first. Eurostat also upwardly revised its growth estimate for the first quarter to 0.5%.

Commodities markets also rallied overnight with prices for iron ore, copper and Brent crude and spot gold each higher.

While there's a sense that abundant global supplies of most commodities will keep pressure on prices, the recent and sudden drop in prices is seen by some as overdone.

• Updated with Wall Street close at 9am NZ time.

(BusinessDesk)