Positive Q4 start for stocks on bailout hopes

By Natsuko Waki

LONDON (Reuters) - World stocks began the final quarter of 2008 on an upbeat note on Wednesday as hopes grew that U.S. lawmakers could reach agreement to revive a $700 billion bailout, but money markets remained stressed.

The U.S. Senate will vote later on a new version of the bailout package to tackle the worst financial crisis since Great Depression after the House of Representatives shocked markets with a rejection earlier in the week.

Hopes for a breakthrough, along with Tuesday's moves by Ireland to pledge up to 400 billion euros to guarantee bank deposits and the bailout of another European bank, Dexia, helped stabilize investor morale, pushing stocks higher across the board.

However, other markets remained deeply stressed, especially in money markets where the beginning of a new financial quarter failed to relieve strains despite recent actions by central banks to pump billions of dollars.

"The market is all about confidence and investors need to just hang in there and not be swayed by different rumors. The worrying sign is that it is based on no more than a hopeful optimism without much basis to it at the moment," said Justin Urquhart Stewart, director at Seven Investment Management.

"This is the eye of the storm until we wait for the decision from the U.S. Senate and see how the restructuring takes place."

The FTSEurofirst 300 index rose 0.7 percent while MSCI main world equity index rose two thirds of a percent, having hit a 2-1/2 year low on Tuesday.

The index fell 17 percent in the previous three months, its worst quarterly performance since the final quarter of 2002.

The dollar fell 0.15 percent against a basket of major currencies while the low-yielding yen fell a quarter percent to 106.31 per dollar.

NEAR PARALYSIS

Money markets remained under pressure globally as banks hoarded cash and wholesale lending dried up.

Early in London on Tuesday, the interbank cost of borrowing dollars overnight was indicated between 3.0 and 5.5 percent, and was last posted at the bottom of that range.

Norway's main overnight interbank money market rate leapt to 7.65 percent, nearly 200 basis points above the central bank's benchmark rate of 5.75 percent.

The cost of borrowing dollars overnight has shot up as high as 6 percent before easing to 3 percent in Europe, still 100 basis points above the Federal Reserve's policy rate.

The December bund future rose 16 ticks, reflecting demand for safer government papers.

U.S. long-term yields, using 30-year Treasuries, fell 3 basis points to 4.2753 percent. According to Barclays Capital, that is nearly 100 basis points below the mean yield for the past 208 years.

"The nominal and return prospects for bonds in 2009 do not look all that auspicious in many jurisdictions," the bank said in a note.

"And unless the world economy's really in for a protracted slump through the end of 2009, then risky asset classes, like equities, will generate higher total returns."

Emerging stocks, measured by MSCI, rose 0.6 percent, having fallen 27 percent in the previous quarter -- their worst quarterly performance in its 20-year history.

Emerging sovereign spreads tightened 21 basis points to trade 393 bps above U.S. Treasuries.

Confidence remained fragile in risky emerging markets after Russia on Tuesday halted trading in exchanges yet again for two hours.

U.S. light crude rose 1.4 percent to $102.03 a barrel, while gold rose to $880.10 an ounce.

(Editing by Mike Peacock)