Global stocks rebound but credit markets jittery

NEW YORK Thu Aug 11, 2011 6:48pm EDT

1 of 15. Traders work on the floor of the New York Stock Exchange, August 11, 2011.

Credit: Reuters/Brendan McDermid

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NEW YORK (Reuters) - Investors swooped back into world stocks on Thursday, picking up beaten-down shares after a mildly encouraging U.S. jobs report dulled fears of recession, although credit markets faced strains similar to those that preceded the 2008 credit crisis.

U.S. stocks rallied more than 4 percent, picking up steam late in the day and reversing the previous day's losses. Shares have whip-sawed all week and the Dow traded in a range of more than 400 points for a sixth straight day.

The broad S&P 500 is still down about 14 percent from its 2011 closing high set on April 29.

"It's a bungee cord market. We've fallen off of a small bridge, the bungee cord bounced us up, and oscillations will diminish, but we're still bouncing around," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.

Gold and the Swiss franc -- which have soared as investors shied away from risk -- both fell. However, each had additional factors influencing their lack of appeal.

Gold faced its biggest daily loss in over a year on profit-taking and an increase in trading margins. Gold futures fell 2 percent to $1,748 an ounce.

The Swiss franc tumbled after the Swiss National Bank said it could ease monetary policy further. Markets focused on the possibility of a temporary peg between the franc and the euro to rein in the soaring Swiss currency.

The sanguine view in the equity market contrasted with nervousness in the short-term funding markets.

The London interbank offered rate, LIBOR, on three-month dollars, the benchmark rate for $350 trillion worth of financial products worldwide, reached fresh four-month highs.

"That is purely a reflection of interbank funding, so it reflects sentiment on whether or not there could be a potential crisis in the funding markets. Every time there's a crisis that's usually what people look at first," said Kenneth Silliman, head of U.S. short-term rates trading with TD Securities in New York.

The U.S. Treasury sold $16 billion worth of 30-year long bonds at a poorly received auction, with investors showing the weakest overall demand in 2-1/2 years and foreigners largely steering clear.

In the open market, the 30-year bond lost 5 points in price immediately after the auction results. The benchmark 10-year note suffered along with 30-year bonds. It last yielded 2.32 percent, up from 2.14 at Wednesday's 10-year auction.

The MSCI world equity index gained 2.9 percent.

The Dow Jones industrial average gained 423.37 points, or 3.95 percent, at 11,143.31. The Standard & Poor's 500 Index was up 51.88 points, or 4.63 percent, at 1,172.64. The Nasdaq Composite Index was up 111.63 points, or 4.69 percent, at 2,492.68.

U.S. financial shares led the way up after taking a beating in the previous session on rumors of trouble at French banks. A 16 percent surge in Cisco Systems also helped sentiment.

Legendary investor Warren Buffett told Fortune magazine he has been buying during this week's sharp market declines and has not yet seen anything that suggests another economic downturn.

TEMPORARY COMFORT

The spike in the LIBOR rate, a key measure of the cost for banks to borrow from one another, raises the question of whether the current funding difficulties may foretell a repeat of the 2008 credit crisis, when vital arteries of global finance seized up.

In the credit markets, the cost of insuring French bank debt hit new records, a sharp contrast to the upbeat stock market picture.

Stock markets were comforted as U.S. initial claims for state unemployment benefits fell last week to the lowest level since early April. Analysts said one week was not enough to show definitive improvement in the struggling labor market, but the better-than-expected data was a welcome surprise.

"Had we seen a jump (in claims) it would have reinforced recession fears. What we've seen here is not anything to allay those fears, but just to set them aside temporarily," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

The anemic pace of U.S. first-half growth has fueled worries of another recession, and analysts are watching for signs the recovery could pick up steam in the rest of 2011.

Oil prices rose for a second day in a row, gaining alongside equities. U.S. September crude settled up $2.83 at $85.72 a barrel.

(Additional reporting by Richard Leong, Karen Brettell and Caroline Valetkevitch; Editing by Dan Grebler)

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