Fed signal, oil retreat boost world stocks

Wed Aug 6, 2008 3:56am EDT

By Natsuko Waki

LONDON (Reuters) - Signals from the Federal Reserve that it is in no rush to raise interest rates combined on Wednesday with a further retreat in oil and forecast-beating results from European banks to trigger a global rally in stocks.

The U.S. central bank left rates steady as expected at 2.0 percent on Tuesday, expressing concerns about both economic growth and inflation. This soothed investors who feared that rising price pressures would prompt it to raise the cost of borrowing in the near future.

Oil prices fell further to a fresh three-month low below $119 a barrel, boosting the dollar to a seven-week high against the yen as it eased concerns about the impact of high energy prices on corporates and consumers.

Investors also cheered results from the financial sector. BNP Paribas reported a smaller-than-expected 34 percent fall in second-quarter net profit, while Commerzbank reported above-forecast net quarterly profit of 817 million euros.

"Investor angst has turned to optimism quickly, and there's a feeling that things will be okay and we can move on," said Heinz-Gerd Sonnenschein, strategist at Postbank in Bonn.

A Reuters poll of 17 primary dealers, banks who deal directly with the Fed, found them unanimously predicting that no interest rate changes would occur in the next two meetings, in September and October.

The FTSEurofirst 300 index rose 0.6 percent while the MSCI main world equity index .MIWD00000PUS also rose two thirds of a percent, coming off Tuesday's three-week lows.

The dollar rose to a seven-week high of 108.54 yen as falling oil prices overwhelmed disappointment that the Fed may not deliver a yield-boosting interest rate hike soon.

"Note that the dollar's strength is not owed to the U.S. economy's robustness, but rather due to the fact that other major economies are faring worse. Solid U.S. macro fundamentals will be necessary for the dollar to retain long-term support," said Junya Tanase, FX strategist at JPMorgan Chase in Japan.

The dollar was slightly down against a basket of major currencies .DXY.

Emerging sovereign spreads tightened 3 basis points while emerging stocks .MSCIEF rose 1.1 percent.

Even with rising stocks, government bonds in Japan and the euro zone rose, reflecting concerns over the slowing economy.

The September Bund future rose 11 ticks while Japanese government bond futures rose to four-month highs.

U.S. light crude stood at $119.15 a barrel after falling as low as $118.10, hit by concerns over weakening demand. Gold was slightly higher at $883.90 after hitting its lowest level in seven weeks.

This week's fall in oil and commodities come after broader commodity prices .CRB posted their biggest monthly loss in at least 10 years in July.

(Additional reporting by Sitaraman Shankar, editing by Mike Peacock)