09/03/2012 10:25 EDT | Updated 11/03/2012 05:12 EDT

World stocks rise after poor China production data convinces traders that easing is on the way

LONDON - Markets started yet another potentially crucial week on a solid note as investors betted on more central bank action and that China would enact more stimulus measures following a dispiriting manufacturing survey.

However, with Wall Street out of action because of the Labor Day holiday, the August trading lull continued into the first day of the new month.

Monday's trading was dominated by a survey suggesting that China's manufacturing sector was contracting. Though that is a bad sign for the global economy, investors think it makes it more likely that the country's monetary authorities will ease monetary policy soon.

"August saw Chinese manufacturing activity hit a three-year low, prompting a return of the 'bad news is good news' trade as markets rose on expectation of some action from the Politburo in Beijing," said Chris Beauchamp, market analyst at IG Index.

Options available to Beijing include reducing interest rates, lowering the amount banks have to hold in reserve or increasing spending. China's economic growth has already fallen to a three-year low of 7.6 per cent in the second quarter.

Hopes that more stimulus in China was on the cards helped European markets post solid gains. Britain's FTSE 100 advanced 0.6 per cent to 5,745 while Germany's DAX added 0.3 per cent to 6,993. The CAC-40 in France was 0.6 per cent higher at 3,428.

Investors around the world will have a number of issues to contend with over the rest of the week, which culminates with Friday's U.S. nonfarm payrolls report for August.

But before then, all eyes will be on Thursday's European Central Bank monthly policy meeting. Its president, Mario Draghi, is expected to announce details of a new bond-buying program that's intended to keep a lid on the borrowing costs of countries like Spain and Italy.

Michael Hewson, markets analyst at CMC Markets, warned that markets "may once again be getting ahead of themselves" again as Draghi may wish to wait to hear the verdict of German constitutional court on the legality of the European Stability Mechanism, Europe's planned bailout fund. The ruling is expected on September 12.

Hopes that the ECB will play a more crucial role in the debt crisis have helped support the euro in recent weeks. After nearly dropping to near two-year lows below $1.20, the euro has pushed back above $1.25. It's trading 0.1 per cent lower Monday at $1.2570.

The U.S. payroll figures, which often set the market tone for a week or two after their release, could be particularly important this month too. Last Friday, Federal Reserve Chairman Ben Bernanke suggested that more central bank action was possible to support the U.S. economy so a bad set of data could mean persuade investors to think the Fed will act sooner rather than later. Previous Fed stimulus packages have shored up markets as the fresh liquidity on offer made its way round financial markets.

Earlier in Asia Monday, stocks closed mostly higher. Japan's Nikkei 225 shed earlier gains to close 0.6 per cent lower at 8,783.89. Hong Kong's Hang Seng added 0.4 per cent to 19,559.21 and South Korea's Kospi climbed 0.4 per cent to 1,912.71.

In mainland China, the Shanghai Composite Index rose 0.6 per cent to 2,059.15 and the smaller Shenzhen Composite Index jumped 1.9 per cent to 854.76.

Trading was also lacklustre in the oil markets, where benchmark crude for October delivery was down 8 cents at $96.39 a barrel in electronic trading on the New York Mercantile Exchange.