By Dominic Lau

Global stocks as measured by the MSCI world index <.MIWD00000PUS> advanced 0.7 percent on the first trading day of 2009, with the pan-European FTSEurofirst 300 <.FTEU3> up 1.6 percent.

Futures for the U.S. Dow Jones industrial average and the S&P 500 pointed to a higher opening later in the day.

That was despite data painting a bleak picture for the global economy after factories in China, India and Russia slashed output and jobs at a record pace in December.

Manufacturing activity in the euro zone also sank to a record survey low last month, below an already dire flash reading, and the outlook remained grim as new orders also sagged to new lows.

"In the face of bad economic news flow, the markets have held up very well and are well off their bottoms," said Mike Lenhoff, strategist at Brewin Dolphin in London.

"Markets are saying we have been discounting all this bad news for the past year and are now holding up. Markets in the past have also tended to do well at the start of the year and the rise could be attributed to a strong seasonal effect."

The downturn in activity was accompanied by falling inflationary pressures, clearing the way for an expected cut in interest rates by the European Central Bank when it meets later this month.

The euro fell 0.4 percent to $1.3936 and the yen also slipped against the dollar, which last year posted its first yearly gain against a basket of currencies since 2005.

Sterling, however, edged lower versus the euro after a survey showed Britain's manufacturing sector contracted for an eight month running in December and house prices fell by a record 16.2 percent year-on-year.

As global demand weakened, oil prices remained in the doldrums after reaching their peak of $147 a barrel in July. Crude traded at below $42 a barrel, down nearly 7 percent.

GOLD, CRUDE EASE

Gold also eased, as oil prices tumbled and the dollar strengthened, cutting the metal's appeal as a currency hedge. However, copper prices firmed.

"People are looking at oil and the dollar for guidance," said Wolfgang Wrzesniok-Rossbach, head of sales at precious metals group Heraeus in Germany. But he added that physical demand for the metal was healthy as the New Year got underway.

"We are still seeing some interest from the retail sale for investment bars," he said. "Since the crisis in the financial markets started, gold has really benefited from its role as a crisis metal, or a safe haven."

Prices in relatively risk-free government bonds were mixed. Yields in benchmark 10-year U.S. Treasuries narrowed 2 basis points, but those for the 10-year Bund were 2 basis point higher at 2.973 percent.

Euro zone government bonds had a stellar year in 2008 with two-year yields falling around 50 percent and 10-year yields by a third as the market rallied due to the credit crunch and resulting economic downturn.

(Additional reporting by Joanne Frearson, Jan Harvey and Kirsten Donovan in London)