* Global stocks pick up as bargain hunters emerge
* Euro off Tuesday's lows but still weak
* Investors still inclined to reduce risk exposure
By Sujata Rao
LONDON, May 26 (Reuters) - Bargain-hunting lifted world
stocks on Wednesday off the previous session's nine-month lows
while the euro pared some losses but was capped by a poorly
received German bond sale.
Buying kicked in on stocks after global indices hit their
lowest levels since last August this week, and Wall Street also
looked set to open on a firm note.
The MSCI index of world stocks rose 1 percent
<.MIWD00000PUS> after falling 1.8 percent on Tuesday while
emerging stocks rose 2.2 percent, partially recovering Tuesday's
4 percent decline -- their biggest one-day fall in over a year.
The euro was down on the day but above lows hit on Tuesday
while the oil price rallied nearly 3 percent, climbing back
above $70 a barrel after a U.S. industry report showed a steep
drop in gasoline stockpiles. []
Financial markets remained jittery, however, and investors
still appeared inclined to reduce risk exposure because of tough
financing conditions in the euro zone that are fuelling fears
the slowdown in credit will hit the banking sector.
Tightening U.S. banking regulation and talk of war on the
Korean peninsula are also weighing on risk appetite, which means
equity gains could prove fleeting.
"We are technically very oversold so we expect to see a
bounce in the market," said Philippe Gijsels, head of research
at BNP Paribas Fortis Global Markets in Brussels.
"But the longer-term picture is still quite challenging ...
Italy has just made cuts to its budget which mean the economy
will be put under severe pressure for quite some time."
By 1120 GMT, the FTSEurofirst 300 <> index of top
European shares was up 2 percent, recouping almost all of the
the previous session's losses.
Banks rose the most, with British banks Lloyds Banking Group
<LLOY.L> and Royal Bank of Scotland <RBS.L> up 5-6 percent and
the rebound in energy and commodity prices boosted mining and
oil firms.
U.S. stock futures were higher. S&P 500 and Nasdaq futures
<SPc1> <NDc1> rose 0.7 percent each while Dow Jones <DJc1>
futures were up 0.5 percent by 1120 GMT.
However, close to $4 trillion has been wiped off the MSCI
world stocks index since April 15 and many investors expect
selling to resume once the bargain hunters step away.
"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
Leuchtmann said he expects more weakness in the euro.
By 1113 GMT, the single currency <EUR=> was 0.3 percent
lower on the day at $1.2321 but up from Tuesday's low of
$1.2172.
However, it remains near a four-year low against the dollar
and upside was dampened by a poorly received German bond auction
that underscored the euro zone's problems.
"The market has been very short and maybe it's time for the
market to take a breather ... but tentative is a good way to
describe the rebound," said Geoffrey Yu, currency strategist at
UBS.
One key sign of continued stress comes from the money market
where short-term dollar funding costs are rising, sparking
memories of the fallout from the 2008 Lehman Brothers collapse.
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. []
In 2008 it was a breakdown in trust between counterparties
that 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 more widespread problems in
the European banking sector.
Fears of a funding crunch grew further 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.
Meanwhile on bond markets, U.S. Treasuries and German Bunds
slipped as the safe-haven bid eased and the disappointing German
bond auction weighed. []
Ten-year U.S. Treasury note futures <TYc1> were down 0.5
percent after hitting a one-year high on Tuesday. On the cash
market, 10-year yields rose 6.9 basis points to 3.23 percent
<US10YT=RR>.
Bund futures <FGBLc1> slipped 0.4 percent to 128.88.
(Additional reporting by Tamawa Desai and Atul Prakash;
Editing by Susan Fenton)
