Cheap stocks stoke buying, Spain yields hit record

A Tokyo Stock Exchange employee looks at a monitor as he works at the bourse in Tokyo June 4, 2012.

NEW YORK (Reuters) - Stocks on world markets rose on Tuesday as battered shares attracted traders and the euro rose after three days of losses, but the euro's gains were capped record-high yields of Spanish bonds on continued worries about the effectiveness of Madrid's bank bailout and the looming Greek elections.

Wall Street stocks rose more than 1 percent, led by cyclical sectors, while U.S. crude oil futures jumped after three days of declines.

Spanish benchmark bond yields rose sharply but came off an earlier high that marked a record since the 1999 launch of the euro. Concern over how difficult it may be for Madrid to access debt markets in the long term after its banks are bailed out kept investors at bay.

The structure of the bailout, agreed over the weekend, has not been confirmed. Current holders of Spanish debt fear the expected debt issuance that is part of the bailout would have a higher repayment priority than regular government bonds.

Concerns that Greece's upcoming elections on Sunday would bring to power parties opposed to its own bailout plan and force a disorderly exit from the euro zone were rekindled by a report EU officials were considering ways to manage fallout from such an event.

"We are just being held hostage by all the news flow," said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago.

"Right now everyone has got a pretty short-term trading mentality," he said. "You have to be ready to abandon your thoughts and change your mind at a moment's notice.

At the closing bell in New York, the Dow Jones industrial average .DJI was up 162.57 points, or 1.31 percent, to 12,573.80. The S&P 500 Index .SPX gained 15.25 points, or 1.17 percent, to 1,324.18. The Nasdaq Composite .IXIC added 33.34 points, or 1.19 percent, to 2,843.07.

MSCI's world equity index .MIWD00000PUS rose 0.7 percent and the euro zone's blue-chip Euro STOXX 50 .STOXX50E index closed up 0.27 percent. U.S. dollar-denominated Nikkei futures added 1.1 percent.

The euro edged above $1.25 to gain more than 0.3 percent on the day versus the greenback. Relative strength in the common currency is seen as short-lived ahead of the Greek election.

"Selling into strength should continue to be the market's mentality and nobody will be comfortable holding risk headed into this upcoming weekend," said Dean Popplewell, chief currency strategist at OANDA in Toronto.

The growing impact of the euro zone crisis on the economic outlook was underlined by data showing a surprise fall in British manufacturing output in April.

Global growth concerns also pushed Brent crude oil prices down 0.9 percent to $97.14 a barrel. U.S. oil was up 0.8 percent at $83.36 a barrel after earlier hitting a one-year low at $81.07.

Market volatility prompted selling in copper, with three-month copper on the London Metal Exchange at $7,395 a ton, 0.3 percent below the $7,420 at the close on Monday, when it rose 1.7 percent.

U.S. Treasuries prices fell as investors prepared for new sales of longer-dated Treasuries on Wednesday and Thursday, with losses accelerating after a three-year note auction drew relatively weak demand. <US/>

The benchmark 10-year U.S. Treasury note was down 23/32, the yield at 1.6642 percent.