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* Euro advances as China affirms FX diversification policy
* China refutes report it's reviewing euro bond holdings
* Bargain-hunting helps global stocks gain traction
By Emelia Sithole-Matarise
LONDON, May 27 (Reuters) - The euro and European shares
pushed higher on Thursday after China denied a report it was
looking to cut its euro zone sovereign debt holdings.
Crude oil prices rose above $72 a barrel on the back of
advances in stock markets which bolstered positive sentiment
from data the previous day showing a surge in U.S. demand.
The euro - pressured by persistent uncertainty about the
scale of the single currency zone's debt crisis - received badly
needed support from the Chinese central bank, which said Europe
remained a key investment market for its foreign exchange
reserves.
Traders said a report stating Kuwait was mulling reducing
investments in the euro zone later knocked the euro off its
highs.
The euro had shed 1.5 percent after the Financial Times
reported China's State Administration of Foreign Exchange (SAFE)
was meeting foreign bankers because of concerns about its
exposure to debt troubles in Europe.
That report was groundless, said SAFE, the arm of the
central bank that manages China's $2.4 trillion in foreign
exchange reserves -- the world's largest stockpile.
"The China comments downplaying the alleged change in
diversification policy are reassuring on the surface and that
has helped the euro rise," said Lee Hardman, currency analyst at
BTM-UFJ.
"But it comes down to actions rather than words and if the
European debt crisis keeps rising, there will be less attraction
for China to diversify from dollars into euros," he said.
The euro extended gains against the dollar to a session high
at $1.2342, up 1.4 percent on the day after the Chinese
comments. By 1115 GMT, the euro was up 1.0 percent at $1.2279.
China has been trying to diversify its currency reserves to
reduce the dollar's dominance in favour of the euro and yen to
curb risks.
BARGAIN-HUNTING BOOSTS STOCKS
The MSCI index of world stocks rose 1 percent as investors
picked up shares beaten down in a sell-off fuelled by fears
Europe's debt crisis could spark a credit crunch and undermine
the global economic recovery.
The pan-European FTSEurofirst 300 index rose over 2 percent
to a one-week high of 994.92. The index remains down around 11
percent from a mid-April peak, on worries about Europe's debt
crisis.
Attractive stock valuations and technically oversold
conditions prompted selective buying in Asia, but investors are
treading cautiously amid persistent concerns over the economic
fallout from the euro zone's debt woes.
"There's still a general reflection that equity markets have
become pretty oversold during the last couple of weeks. Global
economic numbers all look good still and... it's a good day for
the bargain hunters," said Jim Wood-Smith, head of research at
Williams de Broe.
A Reuters poll released on Thursday showed big investors
kept relative faith with Europe despite the debt crisis, with
allocations within equities to the euro zone rising to 23.2
percent in May from 22.3 percent a month earlier.
A rise in U.S. stock futures provided an additional boost.
S&P futures climbed 2.4 percent, with some in the market saying
they thought U.S. shares were due a technical rebound.
U.S. Treasuries and euro zone government bond prices
retreated as the rally in equities cut bids for fixed income
assets.
Gold ticked higher on safe-haven buying.
Spot gold was at $1,214.15 an ounce by 1130 GMT from
1.209.90 late in New York on Wednesday. The metal hit a record
high of $1,248.95 in mid-May.
(Additional reporting by Brian Gorman and Neal Armstrong in
London, editing by Mike Peacock, John Stonestreet)
