* Global stocks surge; risk aversion ebbs on bailout hopes
* Bailout optimism curbs buying of safe-haven bonds, gold
* Dollar falls vs euro as economic news weighs
* Oil rises on bailout hopes, weaker dollar
(Recasts with U.S. markets, adds byline; changes dateline;
previous LONDON)
By Herbert Lash
NEW YORK, Sept 25 (Reuters) - Risk appetite returned to
financial markets on Thursday as growing hopes the U.S.
Congress is close to approving a $700 billion bailout lifted
global stocks and cut the appeal of safe-haven gold and
government debt.
European and U.S. stocks rose more than 2 percent on hopes
the bailout will avert a wider financial crisis and deep slide
in world economic growth.
U.S. and euro zone government debt prices fell, as traders
reversed a recent dash for safety on growing optimism the
bailout of troubled banks is closer to passage, despite a fresh
spate of gloomy U.S. economic data and news.
But in currency markets the U.S. dollar fell against the
euro on lingering nervousness over the effectiveness of the
bailout plan and the disappointing economic news.
The dollar's weakness and optimism over the bailout plan
lifted oil prices more than $2 a barrel in New York.
In equity markets, banking shares jumped on both sides of
the Atlantic as investors bet that the financial sector bailout
could help thaw credit markets and revive lending.
"I certainly think that Congress will pass something and
that will help for a little while. It gives us some time to
unwind some of the positions and see where we stand when the
smoke clears," said Warren Simpson, managing director at
Stephens Capital Management in Little Rock, Arkansas.
Hopes for the bailout's approval gained momentum after U.S.
President George W. Bush said in a national broadcast Wednesday
evening that the United States was in a serious financial
crisis.
U.S. Sen. Christopher Dodd, chairman of the Senate Banking
Committee, on on Thursday said Democrats and Republicans had
reached a "fundamental agreement" on the principles for a
bailout bill.
Before 1 p.m., the Dow Jones industrial average <> was
up 246.75 points, or 2.28 percent, at 11,071.92. The Standard &
Poor's 500 Index <.SPX> was up 29.18 points, or 2.46 percent,
at 1,215.05. The Nasdaq Composite Index <> was up 44.83
points, or 2.08 percent, at 2,200.51.
Shares of JPMorgan Chase <JPM.N> , the No. 3 U.S. bank,
rose 7.4 percent, and Bank of American <BAC.N> advanced 5.35
percent.
Companies seen as economic bellwethers, such as IBM <IBM.N>
and Caterpillar <CAT.N>, rallied on hopes the rescue package
could spur a pick-up in consumer and business spending. IBM
gained 2.5 percent and Caterpillar rose 1.3 percent.
European stocks ended sharply higher, rising for the first
time in four sessions as renewed optimism over the U.S. rescue
plan eclipsed weak economic data and a profit warning by
General Electric <GE.N>.
The FTSEurofirst 300 <> index of top European shares
closed 2.16 percent higher at 1,125.43 points.
Among banking stocks, Credit Agricole <CAGR.PA> gained 6.5
percent and Royal Bank of Scotland <RBS.L> added 5 percent.
But the safe-haven appeal of government debt did not fully
disappear, given worries about the long-term effectiveness of
the bailout program to thaw seized-up credit markets.
The benchmark 10-year U.S. Treasury note <US10YT=RR> fell
15/32 to yield 3.88 percent. The 30-year U.S. Treasury bond
<US30YT=RR> fell 15/32 to yield 4.44 percent.
"There continues to be uncertainty. That means
flight-to-safety bids for Treasuries will remain," said Michael
Pond, Treasury strategist at Barclays Capital in New York.
Low bond yields, a huge spike in stock market volatility
and the premium for borrowing dollars over anticipated official
policy rates, known as Overnight Index Swaps, remained high.
"That is all indicating a very high level of risk
aversion," said Arthur van Slooten, strategist at Societe
Generale.
The Libor/OIS spread blew out to 200 basis points, up from
about 80 basis points at the start of September, while the cost
of borrowing euros and sterling also jumped.
Other signs of stress among banks, such as the premium paid
for three-month euro-dollar deposits over Treasury bill yields,
known as the TED spread, were also near historic highs.
The wide spreads reflect the extent to which banks are
hoarding cash and are loath to lend as they await a resolution
of the U.S. proposal to take troubled assets off banks' books.
Currency trading was choppy as worries remained about when
Congress would approve the plan and how successful the deal
would be in tackling the crisis.
"It's been a real roller-coaster ride," Todd Elmer, a
currency strategist at Citigroup in New York.
The euro <EUR=> rose 0.15 percent at $1.4633, and against
the yen the dollar <JPY=> fell 0.34 percent at 106.62.
The dollar rose slightly against major currencies, with the
U.S. Dollar Index <.DXY> up 0.01 percent 76.995.
U.S. light sweet crude oil <CLc1> rose $2.45 to $108.18 a
barrel.
Spot gold prices <XAU=> fell $9.15 to $871.45 an ounce.
Stocks mostly fell overnight in Asia, pressured by doubts
about the bailout and fears over the economic fallout still to
come from the crisis.
The MSCI index of Asia-Pacific stocks outside of Japan
<.MIAPJ0000PUS> fell 0.62 percent by 1500 GMT. Japanese shares
also lost ground, with the Nikkei average <> down 0.9
percent.
(Reporting by Ellis Mnyandu, Wanfeng Zhou and Nick Olivari in
New York and Jamie McGeever, Jane Merriman, Joe Brock, George
Matlock, Pratima Desai and Jane Baird in London and Blaise
Robinson in Paris; Writing by Herbert Lash; Editing by Leslie
Adler)
