European shares rally, bonds fall on China's yuan assurances

European shares rallied on Thursday after China's central bank said there was no basis for further yuan depreciation after a devaluation this week that has seen the currency slide around 4 percent.

The perkier mood in riskier assets soured investor appetite for safe-haven government bonds, which had benefited from a sharp sell-off in equity and commodity markets prompted by the devaluation. The People's Bank of China (PBOC) said there was no basis for more yuan depreciation in light of strong economic fundamentals, even though the yuan dropped for the third straight day.

The PBOC set its guidance rate CNY=SAEC at 6.4010 per dollar prior to the market opening, weaker than the previous fix of 6.3306. The gap between the guidance rate and the traded spot market rate narrowed sharply as banking sources said the PBOC had stepped up intervention in a bid to stabilize prices.

Still, traders remained cautious. Sources told Reuters some powerful voices in the government were pushing for an even deeper devaluation to help China's struggling exporters. PBOC Vice-Governor Yi Gang dismissed such talk as groundless, but some in the market still expected that China would let the yuan slide further in the face of weakness in the economy. "Investors have pounced on those reassurances from China to push the markets back up a bit. They're taking the Chinese central bank at its word, but I'm still taking those comments with a pinch of salt," said Hantec Markets' analyst Richard Perry.

The pan-European FTSEurofirst index of leading 300 blue-chips .FTEU3 rose 1.4 percent to 1,537.35 with national benchmark euro zone indexes broadly in line with that rise. The MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.6 percent, after U.S. shares rebounded overnight and two out of three main indexes ended in positive territory. The risk-averse mood after China's moves this week had heightened the appeal of safe-haven government debt, which then pushed down U.S. and European bond yields. Yields on German 10-year bonds were 2 basis points higher at 0.64 percent DE10YT=TWEB while benchmark U.S. 10-year yields US10YT=RR were 3 bps up at 2.16 percent in European trade, following a lackluster auction on Wednesday.

"The U.S. clearly needs to watch the global economy and China, but ultimately, if we get a very strong release today, market expectations for a September interest rate hike will probably bounce right back," said Rabobank currency strategist Jane Foley.