(Updates with Wall Street, Libor)
By Natsuko Waki
LONDON, April 2 (Reuters) - World stocks leapt to a
one-month peak on Wednesday and the dollar rose against the yen
as moves by major banks this week to come clean about their
financial woes and raise fresh capital relieved investors.
The cost of borrowing very short-term dollar, euro and
sterling funds fell for a second day as quarter-end funding
pressure faded and after the European Central Bank moved to ease
funding strains.
Government bonds edged lower after investors sold safe-haven
assets for risky ones at the start of the quarter. Energy and
commodity prices recovered from Tuesday's sell-off, providing
support for emerging markets and other risky assets.
Tuesday's $19 billion writedown by UBS <UBSN.VX>,
revelations of a bigger-than-expected writedown at Deutsche Bank
<DBKGn.DE> and strong demand for Lehman Brothers' <LEH.N> share
offering aimed at raising fresh capital all helped to boost
expectations that the worst of the eight-month-old credit crisis
might be over.
"There's a growing sense of optimism in the market, rightly
or wrongly, that the worst of the financial crisis is over ...
and that's raising the market's risk appetite," said Adam Cole,
global head of FX strategy at RBC Capital Markets.
The FTSEurofirst 300 index <> rose 0.5 percent while
the MSCI main world equity index <.MIWD00000PUS> rose nearly 1
percent to its highest level since late February.
U.S. stock futures <SPc1> were pointing to a slightly weaker
open later on Wall Street. On Tuesday U.S. stocks posted their
biggest one-day rally since March 18.
OFFICIAL EFFORTS
Expectations that the Group of Seven rich nations might
launch a big mop-up operation to support financial markets with
public money also improved sentiment. G7 finance chiefs meet in
Washington later this month.
So far a series of liquidity injections by the world's major
central banks have helped to ease strains in the money markets.
Interbank lending rates have risen sharply in the run up to the
end of the first quarter due to concerns about the banking
sector.
Overnight dollar, euro, sterling interbank lending rates
fell for a second straight day <LIBOR>. However, three-month
dollar and euro borrowing costs rose.
"We see upside risk to money market spreads going forward
due to a range of risk factors, including monoliners, credit
spread worries, and annual bank statements," Danske Bank said in
a note to clients.
"On the other hand, central banks have shown great resolve
and determination. Further problems will probably be met by more
initiatives. Most likely the problems will linger on for a
protracted period."
The dollar hit a one-week high against a basket of major
currencies <.DXY> before trimming gains as optimism grew about
the health of the banking sector and the U.S. economy. It rose
to three-week high above 102.30 yen <JPY=> and was about 0.2
percent higher against the euro <EUR=> at $1.5650.
Analysts say choppy trading condition might continue until
the Federal Reserve meeting on April 29-30 where investors price
in a more than 70 percent chance of a 25 basis point interest
rate cut from the current 2.25 percent.
U.S. Treasuries <US10YT=RR> steadied after tumbling on
Tuesday as investor optimism about led to selling of safe-haven
assets.
"Bonds have come a long, long way and even the bullish
clients we speak to regularly are starting to take profits at
the long end of the curve," David Rosenberg, North American
economist at Merrill Lynch, said in a note to clients.
Junk bond spreads widened 200 bps in the first quarter and
investors have priced in an excessive 10 percent default rate
while investment-grade spreads had also widened, he noted.
"If the clouds were to part at least somewhat, even
risk-averse investors may be lured by the 5 percent average
yield on municipal bonds," Rosenberg said.
The June Bund future <FGBLM8> was down slightly on the day.
U.S. crude oil rose 0.7 percent to $101.73 a barrel <CLc1>,
while gold <XAU=> recovered to $890.50 an ounce after falling
three percent on Tuesday.
Firmer commodity prices buoyed emerging market assets.
MSCI's emerging stock index <.MSCIEF> rose 1.9 percent while
emerging sovereign spreads <11EMJ> tightened 4 basis points.
The iTraxx Crossover index <ITCRS5EA=GFI>, most-widely
watched indicator for European credit market sentiment,
tightened 11 basis points to 527 bps.
(Additional reporting by Naomi Tajitsu)
