* World stocks rally, Asian shares at 29-month high
* China service PMI strong, blue chips highest since
mid-2015
* Dollar near two-year trough as Fed commits to easy policy
* Graphic: 2020 asset performance http://tmsnrt.rs/2yaDPgn
* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh
(Updates throughout, adds charts)
By Dhara Ranasinghe
LONDON, Aug 31 (Reuters) - Stocks hovered near record highs
on Monday and were set for five straight months of gains as
investors bet on central banks keeping the stimulus taps open
for years to come as the world tries to overcome the coronavirus
crisis.
Aided by an upbeat reading on China's service sector, MSCI's
broadest index of Asia-Pacific shares outside Japan
hit its highest since March 2018.
In Europe, French water and waste firm Veolia's plans to buy
a near 30% stake in smaller peer Suez for 2.9 billion euros also
lifted stocks, with Paris, Frankfurt
and Milan up 0.3-0.7%.
While London was closed for a public holiday, U.S. stock
futures pointed to a positive Wall Street open .
MSCI's world equity index, which has risen
more than 6% in August, is set for a fifth month of gains as
massive monetary and fiscal stimulus outweighs concern about the
outlook for a world economy battered by the coronavirus.
Stock markets were lifted last week by Fed Chair Jerome
Powell committing to keep inflation at 2% on average, allowing
prices to run hotter to balance periods when they undershot.
The risk of higher inflation in the future, assuming the Fed
can get it there, has pushed up longer-term Treasury yields and
sharply steepened the yield curve.
Yields on 30-year bonds jumped almost 16 basis
points last week and were last at 1.53%, 139 basis points above
the two-year yield. The spread is approaching the
June gap of 146 basis points, the largest since late 2017.
"We know now the Fed is behind inflation and will be less
strict than before, so it would be logical to see higher
yields," said Eric Vanraes, fixed income portfolio manager
at Eric Sturdza Investments in Geneva.
"But at the same time, we are in a tough situation regarding
the economy and the Fed cannot allow a huge steepening of the
curve, otherwise its efforts to fight the crisis would have been
destroyed," he said.
A host of Federal Reserve officials are set to speak this
week, kicking off with Vice Chair Richard Clarida on Monday.
Tokyo's Nikkei closed up more than 1%, buoyed by
news Warren Buffett's Berkshire Hathaway had bought
more than 5% stakes in each of the five leading Japanese trading
companies.
Prime Minister Shinzo Abe's resignation on Friday had hurt
shares on concern about future fiscal and monetary stimulus
policies. Such worries were allayed somewhat by news Chief
Cabinet Secretary Yoshihide Suga, a close ally of Abe, would
join the race to succeed his boss. A slimmed-down leadership
contest is likely around Sept. 14.
"At some point, I think we will see a correction in equities
but not a collapse, and that would be normal and good news for
the market because equity levels are too high and disconnected
to the economic reality and earnings," Vanraes added.
DOLLAR BLUES
The dollar recovered some ground against its peers, but was
set for its fourth straight month of losses.
It was 0.5% firmer at 105.92 yen, but drifted
lower against the euro as the European session wore on. Europe's
single currency was last up 0.16% at $1.1923, having
climbed 0.9% last week.
The dollar index was a touch softer at 92.215,
heading back towards recent two-year lows. It has shed over 1%
this month, on track for its worst August in five years.
The Fed's shift to an average inflation target has hurt a
U.S. currency hit in recent months by concerns about the
coronavirus and its impact on the economy.
"The thin end of holiday markets today, means it's easy to
overinterpret (market moves)," said Chris Bailey, European
strategist at Raymond James. "The big test is coming though at
$1.20."
Elsewhere, gold moved in step with the dollar, last trading
at around $1,965 an ounce -- a touch firmer on the day.
Brent crude oil touched its highest in five months,
underpinned by a 30% cut in Abu Dhabi crude supplies and
encouraging Chinese data.
Brent crude futures were last up 1.3% at $46.40.
U.S. West Texas Intermediate crude was at $43.46 a
barrel, up 49 cents, or 1.1%.
(Reporting by Dhara Ranasinghe with additional reporting by
Wayne Cole in Sydney and Julien Ponthus in London
Editing by Mark Heinrich and Alexander Smith)