Optimism lifts world shares overnight

Wall Street advanced amid optimism that US Federal Reserve Chairman Ben Bernanke will reassure investors that the central bank will not pull back its monetary stimulus before it is satisfied with the economic outlook.

In late afternoon trading in New York, the Dow Jones Industrial Average gained 1 per cent, the Standard & Poor's 500 Index rose 0.83 per cent and the Nasdaq Composite Index increased 0.97 per cent.

The Federal Open Market Committee has begun a scheduled two-day meeting. It will release its latest policy statement on Wednesday in the US, followed by a news conference hosted by Bernanke.

"It's like the market's chewing on a piece of grass, trying to buy time," John Manley, chief equity strategist for Wells Fargo Funds Management, told Bloomberg News.

"Of course the Fed will taper. If they don't taper, heaven help us, but I don't think they'll taper one minute too soon," Manley said. "If they do anything, they'll probably err on the side of caution. They'll phase it back but only when they think they can do it safely. There are signs that it's working."

US Treasuries were steady, however, with the 10-year yield at 2.18 per cent.

"No one wants to take on too much risk before they hear from the Fed," Scott Graham, head of government bond trading at Bank of Montreal's BMO Capital Markets unit in Chicago, one of the 21 primary dealers that trade with the central bank, told Bloomberg. "If we get some sign of tapering sooner than later, the market will take it rough and we should see new highs in yields. And if they are dovish, we should rally further."

The latest American housing report fell short of expectations, though did not diminish optimism about the recovery in the real estate industry. US housing starts rose 6.8 per cent to a 914,000 annualised rate last month, following a revised 856,000 pace in April, according to Commerce Department data.

Meanwhile, the consumer price index rose 0.1 per cent in June, while the so-called core index, which excludes food and energy costs, gained 0.2 per cent.

"Inflation pressures remain very subdued, but downside momentum is fading," Eric Green, an interest rate strategist at TD Securities in New York, told Reuters.

In Europe, the benchmark Stoxx 600 Index edged less than 0.1 per cent lower from the previous close, as did France's CAC 40. Germany's DAX advanced 0.2 per cent, while the UK's FTSE 100 rose 0.7 per cent.

Germany's ZEW Center for European Economic Research said its index of investor and analyst expectations strengthened to 38.5 in June from 36.4 in May.