GLOBAL MARKETS-World stocks hold firm, set for fifth straight month of gains

* World stocks rally, Asian shares at 29-month high
* China service PMI strong, blue chips highest since
mid-2015
* Dollar near two-year trough as Fed commits to easy policy
* Graphic: 2020 asset performance http://tmsnrt.rs/2yaDPgn
* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh

By Dhara Ranasinghe
LONDON, Aug 31 (Reuters) - World stocks hovered near record
highs on Monday and were set to end August with five consecutive
months of gains, as investors bet on central banks keeping up
the policy punchbowl for years to come.
An upbeat reading on China's service sector added to the
positive mood, with MSCI's broadest index of Asia-Pacific shares
outside Japan .MIAPJ0000PUS touching its highest since March
2018.
News that French water and waste firm Veolia hopes to buy a
near 30% stake in smaller peer Suez for 2.9 billion euros
boosted European markets .STOXX , with bourses in Paris
.FCHI , Frankfurt .GDAXI and Milan .FTMIIB up 0.5-0.9%.
London was closed for a public holiday, while U.S. stock
futures pointed to a positive open for Wall Street ESc1
1YMc1 .
That left MSCI's world equity index .MIWD00000PUS near
record high levels. It has risen over 6% in August, set for its
fifth straight month of gains.
Massive monetary and fiscal stimulus has bolstered stock
markets in recent months, overpowering concern about the outlook
for a world economy battered by the coronavirus.
Fed Chair Jerome Powell boosted stock markets last week by
committing to keep inflation at 2% on average, allowing prices
to run hotter to balance periods when they undershot.
The risk of higher inflation in the future, assuming the Fed
can get it there, was enough to push up longer-term Treasury
yields and sharply steepen the yield curve.
Yields on 30-year bonds US30YT=RR jumped almost 16 basis
points last week and were last at 1.50%, 137 basis points above
the two-year yield. The spread was now approaching the June gap
of 146 basis points, the largest since late 2017.
"We know now the Fed is behind inflation and will be less
strict than before, so it would be logical to see higher
yields," said Eric Vanraes, fixed income portfolio manager
at Eric Sturdza Investments in Geneva.
"But at the same time, we are in a tough situation regarding
the economy and the Fed cannot allow a huge steepening of the
curve, otherwise its efforts to fight the crisis would have been
destroyed," he said.
"At some point, I think we will see a correction in equities
but not a collapse, and that would be normal and good news for
the market because equity levels are too high and disconnected
to the economic reality and earnings."
A host of Federal Reserve officials are set to speak this
week, kicking off with Vice Chair Richard Clarida later Monday.
Tokyo's Nikkei .N225 closed up more than 1%, buoyed by
news Warren Buffett's Berkshire Hathaway BRKa.N had bought
more than 5% stakes in each of the five leading Japanese trading
companies. Prime Minister Shinzo Abe's resignation on Friday had hurt
shares on concern about future fiscal and monetary stimulus
policies. Such worries were allayed somewhat by news Chief
Cabinet Secretary Yoshihide Suga, a close ally of Abe, would
join the race to succeed his boss. A slimmed-down leadership
contest is likely around Sept. 14. RECOVERY
The dollar firmed against its peers but was set for its
fourth straight month of losses.
The dollar index rose 0.26% to 92.426 =USD , nudging off
recent two-year lows. It was 0.5% firmer at 105.87 yen
JPY=EBS , while the euro was a touch softer at $1.1885
EUR=EBS , having climbed 0.9% last week.
The Fed's shift to an average inflation target was likely to
continue to weigh on the greenback, analysts said.
"Even if U.S. central bankers are likely to be pleased about
the interpretation of their measures, it is not good news for
the dollar," Commerzbank analysts said in a note.
Elsewhere, the dollar rebound weighed on gold, which fell
0.3% to at $1,957 an ounce XAU= . GOL/
Brent crude oil touched its highest in five months,
underpinned by a 30% cut in Abu Dhabi crude supplies and
encouraging Chinese data. Brent crude futures LCOc1 rose to $46.46 a barrel, the
highest since March, and was last up 1.4%. U.S. West Texas
Intermediate crude CLc1 was at $43.35 a barrel, up 38 cents,
or 0.9%.

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