By Sujata Rao
LONDON, May 26 (Reuters) - Bargain-hunting lifted world
stocks on Wednesday off the previous session's nine-month lows
but the euro continued to fall, slipping towards a four-year low
on fears of a fresh bank crisis in Europe.
Buying kicked in on stocks after this week's sharp falls
that had taken most indices to their lowest levels since last
August. A late-session rally had seen Wall Street close flat on
the day after a weak open.
The MSCI index of world stocks rose almost one percent
<.MIWD00000PUS> off Wednesday's 1.8 percent falls while emerging
stocks rose 1.7 percent a day after posting a 4 percent loss --
their biggest one-day fall in over a year.
The rises however did not conceal market jitters with most
investors thought to be inclined to cut risk because of tough
financing conditions in the euro zone that are fuelling fears
banks could take a hit from the slowing of credit.
Tightening U.S. banking regulation and talk of war on the
Korean peninsula are also weighing on risk appetite, meaning the
current rally could prove a fleeting one.
"There is always bargain-hunting once we have seen markets
fall. But it would be too early to expect confidence to creep
back into the market," said Klaus Wiener, head of research at
Generali Investments, citing the "non-sustainable fiscal
situation" in most developed markets.
By 0836 GMT, the FTSEurofirst 300 <> index of top
European shares was up 1.89 percent after falling 2.4 percent in
the previous session. A rebound in commodity prices boosted
mining stocks, with stocks such as BHP Billiton <BLT.L>, Anglo
American <AAL.L> and Antofagasta <ANTO.L> up 3 to 4.5 percent
European markets are down some 15 percent from the highs hit
six weeks ago, while globally $4.2 trillion has been erased
since April 15 from the MSCI world stocks index
"I don't interpret (higher shares) as a sign that risk
appetite is coming back to the market," said Ulrich Leuchtmann,
currency strategist at Commerzbank in Frankfurt.
MONEY MARKETS
One key sign of continued stress comes from the money market
which is seeing a steady rise in short-term dollar funding
costs, sparking memories of the fallout from the 2008 Lehman
Brothers collapse.
Back then, a breakdown in trust between counterparties led
to dollar hoarding and a lending freeze. This time investors
have been spooked by the rush out of euros and fears that last
weekend's takeover of a small Spanish savings bank by the
central bank might be an omen of widespread trouble.
The three-month Libor dollar rate <USD3MFSR=> is currently
at the highest since last July and is expected to rise almost 20
basis points more over the next four weeks, according to a
Reuters poll of analysts. Click on [].
Fears of a funding crunch grew after Federal Reserve
Chairman Ben Bernanke highlighted that the U.S. central bank's
dollar funding facility would not last forever. The Fed had
reopened dollar swap lines when the Greek crisis was escalating.
Analysts said this was weighing on the euro which was
closing in on a four-year low against the dollar. It had fallen
0.6 percent on the day to $1.2290 by 0727 GMT, hovering near the
day's low around $1.2263. A fall below $1.2143 touched last week
would mark its weakest since April 2006.
Against the yen, it was down 0.7 percent at 110.80 yen
<EURJPY=R> after hitting a 8-1/2 year low on Tuesday.
"The possibility of a test of the downside level in
euro/dollar is more strong than a test of the upside,"
Commerzbank's Leuchtman said.
Meanwhile on bond markets, U.S. Treasuries and German Bunds
slipped as the safe-haven bid eased for now. Ten-year U.S.
Treasury note futures <TYc1> were down 0.3 percent after hitting
a one-year high on Tuesday. On the cash market, 10-year yields
rose 4.2 bps to 3.20 percent <US10YT=RR>.
Bund futures <FGBLc1> slipped 0.28 percent to 129.02.
Oil prices <CLc1> rallied 2 percent to over $70 a barrel.
(Additional reporting by Naomi Tajitsu and Atul Prakash in
London; editing by Jason Webb)
