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Global stocks higher in Fed-led relief rally

Reuters | August 20, 2007
Jeremy Gaunt

Investors boosted stocks and moved back into other riskier assets on Monday as immediate fears of a credit crunch waned following the U.S. Federal Reserve's confidence-building move last week.

European stocks trimmed some earlier gains but stood about 1 percent higher, adding to a 2.3 percent gain on Friday. Asia equities soared earlier, with Japan's Nikkei average recording its biggest one-day gain for 13 months.

Wall Street also looked set for a positive start after a large rally on Friday.

Emerging market debt spreads narrowed and the Japanese yen weakened, both signs of increased risk appetite. MSCI's main world stock index (.MIWD00000PUS: Quote, Profile, Research) was up around 1 percent, but still more than 9 percent off its record high a month ago.

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"It's a positive start to the week, but it's a little too early to say that we're out of the woods," said David Jones, chief market analyst at CMC Capital Markets.

The Fed turned near-panicky financial markets around on Friday by cutting 50 basis points to 5.75 percent off the primary discount rate at which banks borrow from the U.S. central bank.

It was designed both to push liquidity into a drying up banking system and to calm market jitters.

"This move should be seen as more of a reassurance step, should interbank liquidity begin to dry up again," investment bank ING said in a note that also said more monetary easing could be on the way.

Markets have been battered over the past month by fears of financial instability following trouble with risky U.S. mortgages and a squeeze on credit.

The problem has not gone away but some investors have begun looking for bargains as prices are lower and central banks including the Fed are making calming moves.

Fidelity International said on Friday, for example, that it was taking advantage of current market volatility to increase exposure to corporate credit.

STOCKS, CURRENCIIES, BONDS

European shares were solidly higher. The FTSEurofirst 300 index (.FTEU3: Quote, Profile, Research) of leading European shares was up 0.9 percent. Britain's FTSE 100 (.FTSE: Quote, Profile, Research) gained 0.8 percent, France's CAC 40 (.FCHI: Quote, Profile, Research) 1.2 percent and Germany's DAX (.GDAXI: Quote, Profile, Research) 0.4 percent.

Earlier, Japan's Nikkei (.N225: Quote, Profile, Research) rose 458.80 points or 3.0 percent to 15,732.48, recouping some of its 5.4 percent slide on Friday, which ended a week in which it lost 9 percent.

The broader TOPIX (.TOPX: Quote, Profile, Research) was up 2.92 percent, or 43.18 points, at 1,523.57.

MSCI's main emerging market index (.MSCIEF: Quote, Profile, Research) was up 3.7 percent.

Japan's yen weakened broadly, continuing to give back some of last week's hefty gains. The Fed's action jammed the brakes on an unwinding of "carry" trades in which investors sell low-yielding currencies like the yen for higher-yielding ones.

The dollar gained half a percent to 114.98 yen while the euro rose around 0.7 percent to 155.19 yen. The yen hit a 14-month peak against the U.S. currency on Friday before the Fed's move.

The euro was up 0.15 percent on the dollar at $1.3494.

Euro zone government bond yields were flat. The two-year Schatz yield was at 3.977 percent. The 10-year Bund yield was at up 4.300 percent.

Bond prices and yields are inversely related.

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