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World stocks rally on US stimulus hopes

New York - World stocks rose and the dollar fell on Tuesday as dismal US data spurred hopes the Federal Reserve may offer more economic stimulus.

Financial markets have been in turmoil over the past month on concerns the United States may be headed for another recession and as the eurozone’s debt crisis has worsened.

World stocks, as measured by the MSCI All-Country World Index, and Wall Street’s benchmark Standard & Poor’s 500 index are on track for their worst month since 2008, after the collapse of Lehman Brothers.

The MSCI All-Country World Index jumped 1.6%, while the S&P 500 gained 2%. Data from China showing factory sentiment helped boost world shares overnight.

In the latest disappointing news on the US economy, factory output in the US central Atlantic region contracted again in August and new home sales fell to a five-month low in July.

Equity investors are taking a “bad news is good news“ approach, though, betting that the data may spur more action from the Federal Reserve.
“The data today has raised hopes about the Fed’s actions, and after four straight days of losses and flat market yesterday people are willing to jump at buying opportunities," said Larry Peruzzi, senior equity trader at Cabrera Capital Markets in Boston.

There is concern, however, that investors are overly optimistic. Speculation is widespread in financial markets that Federal Reserve Chairman Ben Bernanke will use his Friday speech at a central banker conference in Jackson Hole, Wyoming, to signal a new monetary offensive to support a faltering US economy.

Bernanke, however, is most likely to outline gradualist measures, which would disappoint those looking for a big bang approach such as a fresh round of bond buying, known as QE3.

“The market is really geared up for the idea of additional asset purchases to at least be put on the table when Bernanke speaks,” said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. “I’m not sure it will play out that way, but that’s what the market is betting on now.”

The Fed chairman looks set to discuss ways the central bank could tweak the Fed’s balance sheet as a means to put further pressure on medium and long-term interest rates and anchor them at low levels. These could be implemented in September and October at coming Fed meetings.

Gold prices retreated after earlier hitting record highs as a recovery in appetite for higher-risk assets took the steam out of a rally that many saw as overdone. After rising above $1,900 an ounce, gold was at $1,862.99.

Ongoing fears of European banks’ exposure to heavily indebteded European nations like Greece and Italy is making it more expensive for banks to fund themselves in short-term funding markets.

US bank debt costs are also being pressured in unsecured bond markets. The cost for interbank borrowing -- measured by three-month Libor, or the London interbank offered rate, rose to 0.31178 percentage point on Tuesday.

European banks are facing higher dollar funding costs as U.S. money fund investors, nervous about exposures to peripheral euro zone countries, reduce the length and amount of loans to banks in the region.

On Wall Street, the Dow Jones industrial average was up 1.70%,  Standard & Poor’s 500 Index was up 1.89% and the  Nasdaq Composite Index was up 2.17%.

Stimulus measures by the Fed increase the amount of dollars in the system, driving down the currency’s value, which helps US exports, and prompting investors to seek higher returns elsewhere. The dollar edged down 0.3% against a basket of currencies.

Bonds, which normally move inversely to stocks, saw some light buying after the weak data on speculation the Fed will act to spur the economy, but strong stocks appeared to be keeping a lid on their rally.

Oil prices bounced in choppy trading, supported early by manufacturing data from China and Europe that was less gloomy than expected. Brent October crude rose 50 cents to $108.86 a barrel.
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