World shares bounce after rout but Fed in view

NEW YORK Tue Aug 9, 2011 11:26pm IST

Passers-by walk past a board showing graphs of Japan's stock price indexes, outside a brokerage in Tokyo August 9, 2011. REUTERS/Issei Kato

Passers-by walk past a board showing graphs of Japan's stock price indexes, outside a brokerage in Tokyo August 9, 2011.

Credit: Reuters/Issei Kato

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NEW YORK (Reuters) - World stocks rebounded from a 10-day rout on Tuesday as investors looked to the U.S. Federal Reserve to calm markets, though rallies in gold and the Swiss franc showed some were clinging to safe assets.

The Federal Reserve has rescued world markets in the past, which may explain why some investors were pulling back from the recent gloom. But such expectation also leave markets open to disappointment should the statement after the Fed's meeting on

Tuesday be deemed inadequate.

The Fed may have limited options because the current crisis is not liquidity-driven, as it was in 2008. The meltdown across assets instead reflects worries about faltering economic growth and paralysis at the highest levels of government -- on both sides of the Atlantic -- in dealing with economic problems.

"Short term, the market will hinge on what the Fed has to say, but we think the next few months will remain volatile and it is difficult to say whether now is the right time to buy," said Julian Chillingworth, chief investment officer at Rathbones Brothers plc in London.

In a sign of hesitation that the equity-market rebound could be cut short, safe-haven bets were still favored as gold hit another record and investors pushed into the Swiss franc.

Fears of a new global economic downturn, reinforced by a downgrade of the United States' credit rating last Friday and the debt crisis in the euro zone, had sent world shares down as much as 20 percent from May's peak.

MSCI's all-country world index recovered from early losses and was up 1.1 percent. The earlier drop put it on track for a 10th straight day of declines, which is extremely rare. The record is 13, back in the 1990s.

U.S. stocks were up more than 2.0 percent at midday following Monday's biggest drop in almost three years. European shares also bounced to close up 1.3 percent.

"You had a cataclysmic sell-off in the marketplace," said Cliff Draughn, president and chief investment officer at Excelsia Investment Advisors in Savannah, Georgia.

"You are technically way oversold and secondly, this whole thing has been political."

The Dow Jones industrial average gained 173.66 points, or 1.61 percent, at 10,983.51. The Standard & Poor's 500 Index was up 25.34 points, or 2.26 percent, at

1,144.80. The Nasdaq Composite Index was up 71.94 points, or 3.05 percent, at 2,429.63.

The Fed statement is due at 2:15 p.m. EDT (1815 GMT). It is unclear, however, what the Fed's options are, with interest rates already near zero and the central bank's latest round of bond purchases having failed to stimulate credit demand.

SAFETY FIRST

The saving grace for markets now is that the main arteries of the financial system -- short-term funding markets and clearing and processing operations -- are not imperiled, as they were in 2008. Standard & Poor's downgraded major clearing companies on Monday but it has not affected their operations.

There were no signs of distress in overnight repurchasing markets, where institutions borrow money from one another using U.S. Treasury securities as collateral.

Treasuries, which soared on Monday, gave back some of those gains in active trading.

The 10-year Treasury note was down 11/32, its yield rising to 2.35 percent, erasing about 1/3 of the previous day's gain.

The 30-year bond was down 26/32, yielding 3.69 percent. It touched 3.75 percent in overseas trading and hovered near its lowest levels since Sept. 2010.

Higher-than-expected inflation data from China added to concerns about the global economy. The country's industrial output also grew at a slower pace in July, with the central bank trying to keep prices in check without dragging down the economy.

A Reuters poll found the United States faces one-in-four odds of slipping back into recession, and a weaker economic outlook is raising the likelihood the Federal Reserve will soon do more to boost growth.

Gold hit a record $1,778 an ounce in its biggest three-day rally since the financial crisis in late 2008. It gained more than 3 percent on Monday.

Spot prices retreated from the highs but were still up 1.4 percent.

The Swiss franc surged to record highs for the third day in a row against the euro and the U.S. dollar.

The euro dropped to a fresh low against the franc at 1.03550 Swiss francs on trading platform EBS. It was last at 1.03880, down 3.0 percent for the day. The euro was on track for its biggest one day loss against the franc since December 2008.

The Japanese yen, which also tends to benefit in times of market stress, breached 77 yen per dollar, above levels that triggered official intervention from Tokyo last week.

(Additional reporting by Chuck Mikolajczak in New York and Joanne Frearson in London; Editing by Dan Grebler)

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