GLOBAL MARKETS-Stocks touch 20-month high, bond yields drop after Fed cuts

* MSCI world index up 0.1% to highest since Feb '18
* European shares fall on China trade deal doubts report
* Asian stocks gain 0.3%
* U.S. Treasuries, euro zone bond yields fall
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

(Updates prices throughout)
By Tom Wilson
LONDON, Oct 31 (Reuters) - World stocks edged to their
highest in over 20 months on Thursday after the Federal Reserve
cut rates even as it signaled it would hold back from further
reductions, sending bond yields and the dollar down.
MSCI's world equity index .MIWD00000PUS , which tracks
shares in 47 countries, rose 0.1% to its highest since early
February last year, with many investors remaining expectant of
further easing in spite of the Fed's slightly hawkish tone.
The U.S. central bank on Wednesday cut rates by a quarter of
a percentage point, its third reduction this year, to help
sustain U.S. growth in the face of slowdowns elsewhere in the
world. Yet it signalled there would be no further reductions,
barring economic shocks. Asian stocks outside Japan .MIAPJ0000PUS had earlier
forged ahead on the cuts, following Wall Street's advance to
fresh record highs, climbing 0.3% to touch their highest since
Jul. 30.
But the positive mood was tempered in Europe after a
Bloomberg report that Chinese officials doubt a long-term trade
deal with the United States was possible, which sent shares into
negative territory. The broad Euro STOXX 600 .STOXX fell 0.4%, wiping out
earlier gains, with auto and energy stocks slumping. German
stocks .GDAXI , seen as heavily exposed to international trade,
fell 0.7%.
A deal between Fiat Chrysler FCHA.MI and Peugeot owner PSA
PEUP.PA to create the world's fourth-biggest automaker lifted
Fiat Chrysler shares by 8.5%.
Wall Street futures EScv1 were down around 0.3%.
Jerome Powell, the Fed's chair, had on Wednesday given an
upbeat assessment of the U.S. economy and geopolitical risks
from Washington's trade war with China to Brexit had eased.
Yet many investors held on to expectations that further rate
cuts could come should the U.S. economy turn sour next year, and
on Thursday money moved to riskier assets.
"Markets are discounting some more easing, but not very
aggressively at this stage," said Klaus Baader, chief global
economist at Societe Generale.
"We think the U.S. is going slide into recession, and that
is likely some time around the middle of 2020. If the economy
slides into recession, we think the Fed will continue to cut
interest rates aggressively - even though this isn't mainstream
thinking."
The dollar against a basket of six major currencies .DXY
slipped 0.4% to 97.28, its lowest in a week, after rising a day
earlier.
Bond yields also fell. German Bund yields DE10YT=RR , seen
as a benchmark for euro zone government debt, were set for their
biggest fall this month. U.S Treasury yields US10YT=RR also
dropped, extending a fall from Wednesday, and were last down
around 5 basis points on the day.
Emerging stocks .MSCIEF rose 0.3% to their highest in
three months, and were on course for a second straight month of
healthy gains.
The U.S. central bank had dropped a previous reference in
its policy statement that it "will act as appropriate" to
sustain the economic expansion - language that was considered a
sign for future cuts.
Even so, market players said they thought the Fed could act
should geopolitical risks flare up.
"I think the Fed is likely to remain in a wait-and-see
position in the short term," said Christophe Barraud, chief
economist at Market Securities in Paris.
"If there is a big disappointment on the trade front, that
would likely to lead to another wave of tariffs and a major risk
for the U.S. economy."

POLCIY TOOL BOX
After the Fed cuts, the S&P 500 index .SPX closed at
another record high on Wednesday, though some in the market
voiced concern that central banks across the world lack room to
respond to any economic downturn.
"I'd be worried that there isn't enough in the tool box,"
said Neil Wilson, chief market analyst at Markets.com. "The Fed
is in a better state than most, but I'm not sure what Europe and
Japan can do."
The Bank of Japan kept policy steady on Thursday, but
introduced new forward guidance - a pledge central banks make on
future policy - that commits more strongly to perpetuating
ultra-low interest rates. The Japanese yen rose 0.6% to 108.19 per dollar JPY=EBS ,
its highest in two weeks, holding onto gains after the BOJ's
move and boosted further after the Bloomberg report.
In commodity markets, oil prices were steady despite bearish
signals from rising U.S. crude oil stocks and weak factory
activity in China.
Brent crude futures LCOc1 were last down 0.2%, or 18
cents, at $60.43 a barrel.
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