Global stocks, euro rally on emerging market gains

By Carolyn Cohn

LONDON (Reuters) - World stocks and the euro rallied on Thursday, driven by bargain-hunting and sweeping gains in emerging markets after the Federal Reserve cut interest rates and opened swap lines to four developing economies.

Investors saw a return to risk appetite and the carry trade and renewed weakness in the dollar after the Fed chopped half a point off the fed funds rate to 1.0 percent and left the door open to further cuts.

The Fed also opened up dollar liquidity aid beyond traditional markets, with four new $30 billion currency swap lines with Brazil, Mexico, South Korea and Singapore.

"The Fed's statement has paved the way for further rate cuts ...Its policy outlook is softer, and is pushing the dollar lower," said David Tinsley, economist at nabCapital.

"The Fed is doing its bit to shore up emerging economies, so that's improving risk appetite toward those currencies."

The MSCI world equity index rallied by nearly 3 percent, driven by gains of over 9 percent in the benchmark emerging equities index.

Emerging equities have bounced by 24 percent from four-year lows set on Tuesday.

They got a further boost from the International Monetary Fund's approval of a short-term financing facility for emerging market economies that have a good economic track record but are having difficulties accessing credit.

The euro rose 1.5 percent to $1.3158 within a broad rally toward higher-yielding currencies, but the U.S. currency gained 1 percent to 98.46 against the low-yielding yen.

The FTSEurofirst 300 index of leading European shares rose 0.67 percent, extending its rally into a third day, helped by rising commodity prices.

China, Hong Kong, Norway and Taiwan also cut rates in the past 24 hours, and pressure mounted on the Bank of Japan to reduce rates after it meets on Friday. Asian equity markets surged, with Japan's Nikkei average up 10 percent.

The European Central Bank and Bank of England are also expected to cut rates next week.

But analysts cautioned that investors had taken the opportunity to go bargain-hunting, and markets remained volatile.

"This is a fantastic rally, but it is only a rally," said Justin Urquhart Stewart, director at Seven Investment Management.

"The rate cuts are encouraging. But we're dealing with a slump. It's not a matter of whether it's bad, it's a matter of how bad."

Oil rose by $1.58 a barrel to $69.10, while euro zone government bond futures fell 55 ticks to 116.41, in line with weaker U.S. Treasuries after the Fed cut.

Emerging sovereign debt spreads, a measure of appetite for higher-risk assets, tightened by a hefty 48 basis points to 684 bps over U.S. Treasuries.

(Additional reporting by Brian Gorman and Naomi Tajitsu; editing by Patrick Graham)