NEW YORK (Reuters) - U.S. and European stocks rose and credit spreads tightened further on Thursday as hopes that a deep global recession may have bottomed gained the upper hand.
The U.S. dollar rose against the safe-haven yen amid a modest rise in risk appetite as investors shrugged off the latest signs of worldwide economic weakness.
U.S. crude oil prices rose back above $58 a barrel, tracking the rebound on Wall Street, although a gloomy forecast about world energy demand by the International Energy Agency limited gains.
Investors remain caught between two camps: those anticipating economic recovery and those still worried about recession.
U.S. and euro zone government bonds rose as the weak U.S. jobs data underscored the long road to recovery from the worst global economic slump since World War Two. Gold prices also rose, helped by demand for protection against potential inflation.
"Investors were not afraid to miss the first 10 percent of the market move up because they were more worried about the market moving lower," said Dick Del Bello, senior partner at Conifer Securities in New York.
"But there's an enormous amount of cash sitting on the sidelines, and that's not doing anybody any good. Managers today feel they have to participate."
Stock market gains capped some of the bond rally as equity investors saw the unexpected jump in weekly initial U.S. jobless claims as largely caused by the beleaguered auto sector, in the wake of Chrysler's bankruptcy.
The stock rally was spurred by investors pushing updefensive stocks, such as consumer staples and healthcare. Shares of Coca-Cola Co (KO.N) rose 2.9 percent and drugmaker Merck (MRK.N) gained 1.5 percent.
Bank shares also rose, with Wells Fargo & Co gaining 6.2 percent and JPMorgan (JPM.N) shares adding 3.6 percent. The KBW bank index .BKX shot up 3.7 percent.
The Dow Jones industrial average .DJI rose 46.43 points, or 0.56 percent, at 8,331.32. The Standard & Poor's 500 Index .SPX added 9.15 points, or 1.04 percent, at 893.07. The Nasdaq Composite Index .IXIC gained 25.02 points, or 1.50 percent, at 1,689.21.
European shares edged higher, snapping a three-day losing run, as gains for several heavyweight banks more than offset a drop in energy stocks on the weaker crude prices.
The pan-European FTSEurofirst 300 .FTEU3 index rose 0.5 percent to close at 835.71 points. The index is up 29 percent from the lifetime low it hit on March 9.
U.S. crude for June delivery rose 60 cents to settle at $58.62 a barrel, after initially hitting $60 a barrel, a six month high, earlier this week.
Oil prices have been tracking equities markets in recent months as traders look to stocks for signs of an economic recovery that could lift ailing world fuel demand.
Paris-based IEA, adviser to 28 industrialized nations on energy policy, said oil's rise to $60 this week was due to sentiment rather than demand. Consumption is set to fall by 2.56 million barrels a day in 2009, it said.
"The oil price seems to have moved a bit higher in the past month largely on the basis of equity markets and sentiment about potential economic recovery," David Fyfe, head of the IEA's oil, industry and markets division, told Reuters.
"But we're not seeing it in terms of the preliminary demand data for early 2009," Fyfe said.
Copper prices tumbled to two-week lows on concerns about Chinese demand and concerns about the economy.
The worst economic figures in half a century from Spain, the euro zone's fourth biggest economy, reinforced expectations the 16-nation euro bloc will report a deepening recession in the first quarter in data to be published Friday.
Spanish gross domestic product shrank 1.8 percent quarter-on-quarter after a 1.0 percent contraction in the final three months of 2008.
The European Union's top economic official said the economy is showing the first positive signs amid its biggest crisis since the grouping's foundation 50 years ago, but it is not yet in recovery.
The June Bund future rose 37 ticks at 121.69, after earlier reaching its highest level in a week at 121.94.
The benchmark 10-year U.S. Treasury note rose 2/32 in price to yield 3.10 percent. The two-year U.S. Treasury note added 1/32 in price to yield 0.86 percent.
Inter-bank U.S. dollar funding costs marked a fresh low, extending their decline and credit spreads compressed further as the interbank money market continued its steady recovery.
Hopes that the global recession may be touching bottom and first-quarter bank results that were not as bad as expected have soothed a sector severely hit by the credit crisis.
The dollar fell against a basket of major currencies, with the U.S. Dollar Index .DXY down 0.29 percent at 82.329.
The euro was up 0.32 percent at $1.3641, and against the yen, the dollar was up 0.37 percent at 95.75.
U.S. gold futures for June delivery settled up $2.50 at $928.40 an ounce in New York.
Reporting by Chuck Mikolajczak, Gertrude Chavez-Dreyfuss, Burton Frierson in New York; Brian Gorman, Ian Chua, Kirsten Donovan and David Sheppard in London; writing by Herbert Lash; Editing by Leslie Adler