GLOBAL MARKETS-Shares up as Cyprus fears ease, eyes turn to Fed

Wed Mar 20, 2013 12:25pm EDT

* U.S., European stocks recover on hopes Cyprus deal will emerge

* Cypriot leaders reject bailout plan, look for alternative

* Euro up 0.2 pct at $1.2910, off 4-month lows

* Fed meeting outcome also in focus, few major changes expected

By Ryan Vlastelica

NEW YORK, March 20 (Reuters) - Stock markets around the world rose and the euro held firm on Wednesday on hopes that European policymakers would contain the financial crisis in Cyprus after lawmakers there voted down a rescue plan.

Investors also turned their attention to the outcome of the U.S. Federal Reserve's policy meeting that ends later on Wednesday, though few major changes in policy are expected.

Efforts to rescue Cyprus were thrown into disarray on Tuesday when its lawmakers rejected the conditions for a 10 billion euro European Union bailout. But markets have calmed as investors expect an alternative solution to emerge.

"Concerns have faded, and it doesn't seem like we'll see much headline risk from Cyprus as the European Central Bank continues to work toward a solution," said Mark Martiak, senior wealth strategist at Premier/First Allied Securities in New York.

U.S. and European stocks were on track to snap a three-day streak of losses, though European shares were off session highs after a spokesman for the Cyprus government denied media reports of a deal to sell Cyprus Popular Bank to Russian investors.

Europe's broad FTSEurofirst 300 index edged 0.3 percent higher, while MSCI's world equity index rose 0.4 percent.

The euro bounced off four-month lows to $1.2945 and the U.S. dollar index dipped 0.3 percent.

The Dow Jones industrial average was up 53.64 points, or 0.37 percent, at 14,509.46. The Standard & Poor's 500 Index was up 7.81 points, or 0.50 percent, at 1,556.15. The Nasdaq Composite Index was up 15.34 points, or 0.47 percent, at 3,244.43.

In Asia, Hong Kong stocks bounced off a three-month low thanks to a rally in Chinese shares, but MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.1 percent as other regional markets worried about Cyprus. Japanese markets were closed for a holiday.

Investors were looking ahead to a statement from the Federal Reserve's policy committee and a news conference by Chairman Ben Bernanke later in the day.

Markets expect the Fed to maintain its $85 billion monthly bond-buying stimulus effort despite recent improvements in U.S. economic data. But they will closely monitor Bernanke's comments for signals on how long the policy will continue.

"The Fed has made it clear its bond-buying program will continue at least through mid-2015, so risk assets will continue to be embraced, but if the Fed indicates it will start buying a reduced amount, that may be something that could lead to a pullback," Martiak said.

Concerns about Cyprus were clearly evident at an auction of German government bonds, seen as a European safe haven. The sale of 3.36 billion euros in new 10-year securities drew strong demand and sold at an average yield of 1.36 percent, the lowest auction price since July last year.

Still, German government bonds ticked lower, with the Bund future down 0.2 percent at 144.33. In the U.S. bond market, the benchmark 10-year Treasury note was down 8/32, the yield at 1.9303 percent.

Bond investors were looking to comments by the European Central Bank, which has said it will provide liquidity to Cypriot banks within certain limits, even though if there was no bailout, the bank would have to end emergency lending assistance under its current rules.

Cypriot leaders were holding crisis talks in Nicosia on Wednesday to try to avert a financial meltdown after Tuesday's overwhelming rejection of the terms of the European Union bailout, which involved a levy on bank deposits.

The country was trying to get help from Russia, given the high level of Russian deposits in Cypriot banks, but failed to agree on any loan deal at a first round of talks.

UK BUDGET EYED, OIL RISES

The main UK share index dipped a modest 0.2 percent. British finance minister George Osborne called on the Bank of England to do more to help spur the country's stagnant economy as he announced a halving of this year's growth forecast in an annual budget statement.

Oil prices joined in the general recovery, with Brent crude rising 0.4 percent to $107.90, while U.S. crude futures added 0.2 percent to $92.36.

"Clearly, market players anticipate that an alternative solution will be found for Cyprus," said Carsten Fritsch, analyst at Commerzbank. "Nonetheless, the uncertainty surrounding this issue is likely to continue to keep oil prices in check in the short run."

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