By Naomi Rovnick and Kevin Buckland
LONDON/TOKYO (Reuters) -European and Asian stocks rallied on Friday, buoyed by hopes that the world's biggest central banks are close to ending a long cycle of rate rises, as well as data that signalled China's economy was poised for a rebound.
Europe's index, which rose 1.5% on Thursday, gained a further 0.9% in early dealings on Friday. In London, the rose 0.9%, buoyed by mining stocks.
The European Central Bank (ECB) hiked its key interest rate to a record 4% on Thursday and warned it would stay at this level until above-target inflation was dealt with.
Still, markets clung to hopes that the ECB, as the euro zone economy weakens, will wait for more evidence its monetary tightening so far has slowed the economy and then tilt towards rate cuts.
"The key thing for markets is that a dovish hike suggests we are getting closer to the end," said Parisha Saimbi, G10 FX rates strategist at BNP Paribas (OTC:) in London. "They are (also) going to wait for the pass through of monetary policy so far, and to this extent equities are performing well."
Also bolstering investors' risk appetite on Friday, fresh data showed Chinese gauges of retail sales and industrial output for August topped economists' expectations.
Analysts had become increasingly pessimistic about the outlook for the world's second-largest economy, as a property downturn fed into weak consumption and rising youth unemployment.
But China's central bank's late on Thursday cut banks' reserve ratio requirements for a second time this year, in a move designed to stimulate the economy by increasing the flow of credit to households and businesses.
MSCI's broadest index of Asia-Pacific shares was up 0.7%. The index provider's gauge of world stocks rose 0.3%.
"It's certainly not a definitive turning point, but perhaps we're seeing green shoots in China's economy," said Kyle Rodda, senior market analyst at brokerage firm Capital.com.
"When you look at the tactical stimulus Chinese authorities are putting in place and the slight stabilisation of the economy, it gives you a reason to start feeling constructive," said Florian Ielpo, head of macro at Lombard Odier Investment Management.
In currency markets the euro rose 0.1% to $1.063, as it clawed its way off an overnight trough of $1.0632, the lowest level since March 20.
A gauge of the U.S. dollar against six of its biggest developed-market peers stuck close to the six-month peak it reached overnight, buoyed primarily by the euro's steep overnight slide on the view that the ECB's rate hike may be its last.
The so-called edged down 0.12% to 105.23, after hitting the highest since early March at 105.43 on Thursday. The gauge remains on track for its ninth straight weekly advance, the longest run in nine years.
U.S. pointed to a 0.18% rise on Friday, after the cash index rose 0.84% on Thursday.
U.S. data showed producer prices increased by the most in more than a year in August and retail sales also rose more than expected. But both of those figures were swelled by a rise in the price of gasoline, which does not form part of the Federal Reserve's favoured measure of underlying, or "core" inflation.
As a result, traders stuck to bets for the Federal Reserve to skip a rate hike next week, in what might be the end of the tightening cycle.
In energy markets, futures rose 0.6%, to $90.68.