(Updates throughout, adds Wall Street outlook)
By Jeremy Gaunt, European Investment Correspondent
LONDON, Jan 24 (Reuters) - Investors poured back into
equities on Thursday, hoping a rescue plan for ailing bond
issuers would stop a new round of credit losses, although claims
of a massive trade fraud added to financial sector worries.
Wall Street looked set to open higher and demand for bonds
fell sharply as equities rebounded. The dollar weakened.
Societe Generale <SOGN.PA>, meanwhile, said an "exceptional
fraud" by one of its traders would cost the group 4.9 billion
euros ($7.16 billion).
European and Asian stocks markets took their cue from
overnight gains on Wall Street to rise sharply. The pan-European
FTSEurofirst 300 <> was up 4.9 percent and Japan's
benchmark Nikkei <> closed 2.1 percent higher.
The key driver was news that New York's insurance regulator
had pressed major banks on Wednesday to put up billions of
dollars to support wobbly bond insurers.
Insurers have become the latest sector to worry investors in
the credit crisis. The debt they underwrite shares the top
rating of many of these firms, so if the firms are downgraded
because of losses, the debt rating goes down too.
This would force some investors to sell, dumping billions of
dollars of municipal bonds, repackaged loans and the like onto
markets, sending borrowing costs soaring and forcing more
investor write-downs.
"If these (insurance) guys would fail, it would be much more
catastrophic for banks' balance sheets and we would see another
round of write-downs," said Edmund Shing, strategist at BNP
Paribas in Paris.
Investors are also still digesting the U.S. Federal
Reserve's emergency 75 basis point cut in benchmark interest
rates on Tuesday with expectations of more to come.
Japan's market, meanwhile, was boosted by discussions among
the country's ruling party about helping the stock market
recover. The draft proposals included a call for the Bank of
Japan to cut interest rates to zero again.
Overall, the new optimism wiped away some of this week's
sharp losses on bourses. European investors, however, were
rattled by the alleged fraud at Societe Generale, one of the
biggest in financial history.
As well as the 4.9 billion euro cost, SocGen announced plans
to raise 5.5 billion euros through a capital increase to shore
up its balance sheet, also reeling from a crisis in global
credit markets.
SocGen shares were down 4 percent after earlier being
suspended.
BETTER IFO
European markets were little changed by a
better-than-expected Ifo economic research institute report on
German business confidence.
Euro zone government bond tumbled as stocks bounced back and
European Central Bank Governing Council member Axel Weber made
hawkish comments interpreted as lowering the likelihood of ECB
rate cuts.
"If equities hold up on the back of this bond insurers
rescue package, then it is going to be hard for bond markets to
generate any upward price momentum so the risks would be for a
bigger short-term pull-back," said ABN AMRO rate strategist
Jason Simpson.
Two-year Schatz yields <EU2YT=RR> were 16 basis points
higher at 3.394 percent, while 10-year yields <EU10YT=RR> were 7
basis points higher at 3.981 percent.
The euro climbed against the dollar <EUR=>, up a third of a
percent at $1.4686. The dollar was flat at 106.68 Japanese yen
<JPY=>. The euro rose a third of a percent to 156.61 yen
<EURJPY=>.
(Editing by Ruth Pitchford)
