The pan-European STOXX index was up 0.4% and U.S. stock futures also rose.

In bond markets, the U.S. 10-year Treasury yield was down 5 basis points to 4.47% and German yields, which touched six-month highs last week, also dropped.

All focus was on the ECB, which is considered almost certain to trim rates by a quarter point to 3.75% on Thursday.

However, a surprisingly high reading for euro zone inflation, out last week, further weakened the case for a rapid round of reductions. Markets now price in fewer than 60 basis points of easing now - meaning two 25-basis point cuts and less than a 50% chance of a third.

"There's a relatively positive risk tone to start the week, which seems like a continuation of the positive momentum seen on Friday, albeit is somewhat surprising given the bumper calendar of event risk coming up," said Michael Brown, strategist at broker Pepperstone in London.

China's factory activity grew at the fastest pace in about two years in May, data showed on Monday. That extended the optimism prevailing in markets following Friday figures showing the U.S. Federal Reserve's preferred measure of inflation held steady in April.

"The ECB decision is perhaps the most important event to watch, particularly after last week’s inflation data which raises the hawkish risk that there is only one more cut this year after a 25bp reduction on Thursday," Brown said.

Markets also imply around an 80% chance the Bank of Canada will cut rates at its meeting on Wednesday and around 60 basis points of easing this year, though analysts are hopeful the easing will be even deeper.

Investors are a lot less dovish on the Fed, seeing little prospect of a move until September, though the odds of a move then increased after Friday's inflation data. They price in less than a 60% chance of a second cut by December.

The outlook could change this week given data due includes key surveys on manufacturing on Monday, services on Wednesday and the May payrolls report on Friday in which unemployment is seen holding at 3.9% as 190,000 net new jobs are forecast to have been created.

In Europe, focus was also on a downgrade to France's credit rating by Standard & Poor's, but the country's bonds showed little reaction.

ASIAN STRENGTH

Currency markets saw the U.S. dollar start June on a steady footing, last flat against a basket of peers after it posted its first monthly decline of 2024 in May.

The euro was down 0.1% against the dollar at $1.0841.

The yen, this year's worst performing G10 currency hurt by low Bank of Japan interest rates, gained 0.3% against the dollar at 156.83, after hitting a four-week low of 157.715 last week.

Emerging markets were in focus following elections in India and Mexico.

India's rupee strengthened and its stock market rose to a record high, buoyed by expectations of sustained economic growth as Prime Minister Narendra Modi looked set for a third term.

The Mexican peso, however, was down 3% as markets feared Claudia Sheinbaum's landslide victory could bring constitutional change.

Earlier, Asian stocks rose on the back of the strong Chinese data, along with prints from Japan and South Korea.

Gold was up 0.1% at $2,330 an ounce, having now rallied for four months in a row helped in part by buying from central banks and China. [GOL/]

European natural gas prices rose over 8% to their highest this year at over 37 euros/ MWh as an outage in Norway, which overtook Russia in 2022 as Europe's biggest gas supplier, pushed exports sharply lower on Monday.

Oil prices see-sawed after OPEC+ agreed on Sunday to extend most of its oil output cuts into 2025, though some cuts will start to be unwound from October 2024 onwards. [O/R]

Brent was last up 0.2% at $81.24 a barrel, while U.S. crude was up 0.1% at $77.04 per barrel.