Positive fourth quarter start for world stocks on bailout hopes

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 the 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 Dexia (DEXI.BR), 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 in billions of dollars.

Reflecting the uncertainty, U.S. stock futures fell around 1 percent, indicating a weaker open on Wall Street later.

"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 .FTEU3 rose 0.8 percent while MSCI main world equity index .MIWD00000PUS rose 0.7 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 .DXY fell 0.25 percent against a basket of major currencies while the low-yielding yen was unchanged at 106.10 per dollar.

NEAR PARALYSIS

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

The interbank cost of borrowing dollars for three months rose to 4.15 percent from 4.05 percent on Tuesday at the daily London fixing.

A narrowing gap between market rates and expected interest rates to 245.25 basis points only gave limited relief.

Norway's main overnight interbank money market rate leapt to 7.66 percent, nearly 200 basis points above the central bank's benchmark rate of 5.75 percent.

The December bund future rose 7 ticks, reflecting demand for safer government papers.

U.S. long-term yields, using 30-year Treasuries, fell 3 basis points to 4.2499 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 .MSCIEF, rose 0.5 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 0.4 percent to $101.02 a barrel, while gold rose to $875.60 an ounce.

(Editing by Ron Askew)