European markets subdued after week long advance

LONDON -- European stocks fell modestly Friday at the end of a week when world markets shot higher amid mounting optimism about the global economic recovery. Chinese shares, though, rallied hard as traders returned to their desks following a weeklong holiday.

Meanwhile, the dollar garnered some support after U.S. Federal Reserve chairman Ben Bernanke spoke about the need -- eventually -- to raise interest rates to counter potential inflationary problems.

In Europe, the FTSE 100 index of leading British shares was down 4.45 points, or 0.1 percent, at 5,150.19 while Germany's DAX fell 6.07 points, or 0.1 percent, to 5,710.47. The CAC-40 in France was 4.96 points, or 0.1 percent, lower at 3,801.85.

Similar modest losses are expected when Wall Street opens later. Dow futures were down 18 points, or 0.2 percent, at 9,729 while the broader Standard & Poor's 500 futures fell 2.7 points, or 0.3 percent, to 1,061.10.

Solid economic data around the world and an encouraging start to the third-quarter U.S. earnings reporting season have helped stock markets around the world recover their poise after a few weeks of unremarkable progress.

The second quarter earnings season was generally better than expected and helped fuel a big rise in share prices in July and August. However, the forecast-busting earnings were largely due to cost cutting that are unlikely to be repeated.

Early signs are that firms are growing more optimistic about the business environment. Aluminum company Alcoa Inc., which kicked off this earnings season, forecast an 11 percent increase in worldwide aluminum demand, largely on the back of robust growth in China. The earnings season in the U.S. goes up a gear next week and the big investment banks, Goldman Sachs Group Inc. and JP Morgan Chase & Co., will be the main focus of attention.

However, with little on the calendar Friday, trading levels could remain subdued.

"It is a quiet day on the economic and earnings calendar in the States, so today's trading could well be directionless, just consolidating the gains seen for the week so far," said David Jones, chief market strategist at IG Index.

There was more activity in Asia earlier, especially in China, where Shanghai's main index climbed 132.29 points, or 4.8 percent, to 2,911.72, easily making the index the best performing in Asia.

Elsewhere, Japan's Nikkei index added 183.92 points, or 1.9 percent, to 10,016.39 while Hong Kong's Hang Seng rose 6.54 points, or less than 0.1 percent, at 21,499.44.

South Korea's Kospi added 1.9 percent to 1,646.79 after its central bank left its key interest rate unchanged at a record low, saying it would stick to an "accommodative stance" for now. Korea is believed to be close to following Australia in raising rates, but the central bank said inflation does not appear to be a problem.

Singapore's Straits Times Index was fractionally lower and Australia's index fell 0.3 percent.

Oil prices fell to near $71 a barrel, giving up part of the previous day's big gains, as the U.S. dollar rebounded. The November contract was down 31 cents at $71.38; it rose $2.12 to $71.69 on Thursday.

The dollar rose 0.4 percent to 88.70 yen while the euro fell 0.2 percent to $1.4721.

The U.S. currency recovered somewhat from recent losses after comments from U.S. Federal Reserve chairman Ben Bernanke about the need for a thought-out exit strategy to the extraordinary monetary measures the central bank has taken over the last year or two.

Though Bernanke said accommodative policies will likely be "warranted for an extended period," he said "we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road."

Once the Fed starts raising rates, then investors will get a better return on the dollar. As a result, expectations that they may rise sooner than previously anticipated helped support the U.S. currency, which has been languishing near year-lows against the euro and the yen amid concerns about its future status as the world's leading reserve currency.

Jane Foley, research director at Forex.com, said Bernanke "did little more than state the obvious," but the fact he said it was enough to excite currency markets.