Record Election Day rally for stocks, credit thaws

By Burton Frierson

NEW YORK (Reuters) - U.S. stocks had their biggest Election Day rally ever on Tuesday as investors looked forward to the end of the uncertainty surrounding the long fight for the White House, while global credit markets showed more signs of a thaw.

U.S. voters went to the polls to decide who will face the challenge of leading the world's largest economy out of its worst financial crisis in 80 years.

Polls close in parts of Indiana and Kentucky at 6 p.m. EST and over the following six hours in the other 48 states and the District of Columbia. [ID:nN04356344]

In the United States, the benchmark S&P 500 stock index rose 4.1 percent, to a four week closing high..

Europe's FTSEurofirst 300 stock index climbed 4.3 percent, and Japan's Nikkei rose 6.3 percent to a two-week high.

Global stocks, as measured by the MSCI World index, have risen 21.8 percent from their 5-1/2 year lows hit in late October.

Interbank lending rates fell to their lowest in five months as the sector tried to put the worst of the credit crisis behind it, but overnight deposits at the European Central Bank hit a record high, showing banks are still hoarding their cash.

The global credit crunch, which stemmed from a collapse in the U.S. housing market, has prompted banks to pull back lending to each other and to businesses and households for over a year now.

There were other mixed signals emerging about financing conditions, with issuance of commercial paper down for a third consecutive day on Monday. Companies use this short-term debt to fund their operations.

On Monday, the Federal Reserve said most U.S. and foreign banks had tightened lending standards across the board in the last three months.

Synchronized rate cuts by central banks and emergency government packages worth some $4 trillion may have prevented a banking sector meltdown, but the world economy is in poor shape.

New orders received by U.S. factories took a surprisingly steep tumble for a second month in a row during September, according to the U.S. Commerce Department on Tuesday.

In an attempt to deal with the economic slowdown, Australia cut interest rates sharply. Australia's bigger-than-expected 75-basis-point rate cut followed cuts in the United States, China and Japan last week. Britain and the euro zone are expected to follow suit on Thursday with half-point reductions.

"Each of the big developed economies now is either in a severe recession or well on the way," said Rory Robertson, interest rate strategist at Macquarie in Sydney.

Australia's central bank said there was significant weakness in major economies in explaining why it cut rates to 5.25 percent, the lowest since March 2005.