* Euro zone stocks hit highest since Feb 5
* FTSE 100 up 0.9 pct after inflation unexpectedly falls
* World FX rates in 2018 tmsnrt.rs/2egbfVh
* Global asset classes performance 2018 tmsnrt.rs/2H82OFO
* Real yield on U.S. 2Y Treasuries higher than S&P 500 dividends tmsnrt.rs/2JSYMCO
By Helen Reid
LONDON, April 18 (Reuters) - Global stocks climbed to a near four-week high and Wall Street geared up for a strong open on Wednesday as powerful U.S. first-quarter earnings, notably from Morgan Stanley, helped revive risk appetite.
MSCI’s index of world stocks was up 0.3 percent at 1203 GMT, while the top index of euro zone stocks rose 0.3 percent, having touched its highest since Feb. 5, when a spike in volatility amplified a sell-off in global equity markets.
S&P 500 futures sparked higher, rising 0.4 percent by 1203 GMT as investors digested the latest batch of U.S. results with Morgan Stanley shining.
The bank’s shares climbed in pre-market trading after a record jump in quarterly profits, up 40 percent thanks to a strong trading boost.
It kept the pace set by Goldman Sachs which reported a surge in profits on Tuesday, also driven by a sharp increase in trading as market volatility rose.
Analysts have downgraded their European earnings estimates ahead of the first-quarter results season, while U.S. companies are expected to deliver stellar results.
Investors were watching Europe’s earnings season for signs of strain from a stronger euro, with Continental providing an early indication the currency’s rise was hurting exporters.
The tyre maker fell 4.3 percent, driving a pullback in Germany’s DAX, after a negative hit to earnings from exchange rates forced it to lower its outlook.
But a fall in the S&P 500 volatility gauge reflected investors’ renewed confidence in the resilience of equity markets. The VIX edged down, near a six-week low.
“Volatility has come down because expectations are very strong for the earnings season and the market is happy to see some hard data,” said Laurent Godin, equity analyst at Indosuez Wealth Management.
Britain’s FTSE 100 stood out with much stronger gains. It was up 0.9 percent after an unexpected fall in British inflation to a one-year low dented the pound — good news for its high percentage of overseas revenue earners.
While investors were refocusing on fundamentals after weeks dominated by geopolitical tensions, the latest Bank of America Merrill Lynch (BAML) survey of fund managers showed signs of caution.
Investors cut their equity allocation to an 18-month low and increased their cash balances.
“Just like they were chasing the market up in January, investors have gradually started to sell,” said Clark Fenton, chief investment officer at Agilis Investment Management.
“I think that gives the market scope to rally a bit more as positioning has lightened up.”
TRANS-ATLANTIC YIELD GAP WIDENS, CURRENCIES MUTED
Fund managers named the threat of trade war as the biggest “tail risk” in BAML’s survey, while they were less concerned about inflation causing convulsions in bond markets.
Monetary tightening, proceeding at a different pace on either side of the Atlantic, was making its mark on bond markets.
The gap between U.S. and German two-year bonds reached its widest in nearly 30 years, reflecting the diverging monetary policy outlook.
“In some ways I am sort of surprised that it hasn’t mattered more,” said Agilis’ Fenton, referring to the trans-Atlantic divergence. “I would have thought it would have helped European equity prices more on a relative basis.”
The U.S. yield curve - the gap between U.S. 2-year and 10-year government bond yields — flattened back slightly, having fallen to a low of 41.8 basis points overnight.
“I would worry if [the curve] got inverted. It’s probably a bit premature to get too bent out of shape about it now,” said Fenton.
The rise in short-dated yields has pushed the real yield on U.S. two-year Treasuries above the S&P 500 dividend yield for the first time in 10 years. tmsnrt.rs/2JSYMCO
Currency market movements, outside of a sliding sterling, were restrained.
The euro was stuck at $1.2362, after topping out at $1.2413 overnight, while the dollar index hovered at 89.5.
The yen pulled back to 107.23 against the dollar, pushed down by signs of progress in talks between South and North Korea.
Strong metals prices, boosted by supply concerns after U.S. sanctions on Russian aluminium giant Rusal, helped send Europe’s basic resources stocks surging 2.1 percent.
Oil prices also continued their relentless rise.
Brent crude futures were up 86 cents at $72.44 a barrel, while U.S. crude rose 95 cents to $67.48 a barrel.
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Reporting by Helen Reid Editing by Catherine Evans and Jon Boyle