*U.S. stocks rally, dollar gains on European weakness
*Wells Fargo buying Wachovia for $15.1 bln
*U.S. job rolls suffer deepest cut in 5-1/2 years in Sept
By Daniel Bases
NEW YORK, Oct 3 (Reuters) - U.S. stock markets rose on
Friday after a $15.1 billion merger deal between Wells Fargo &
Co <WFC.N> and beleaguered Wachovia Corp <WB.N>, overshadowing
the biggest drop in U.S. payrolls in 5-1/2 years.
The U.S. economy lost 159,000 non-farm jobs last month.
Employment contracted for a ninth straight month, even before
the labor market experienced the full shock from September's
series of bank troubles.
A deteriorating financial backdrop in Europe is giving a
sustained lift the U.S. dollar even as America's economy is
working its way through the financial turmoil and economic
slowdown.
"We've seen weaker data in history, but these look pretty
decisively to be the beginning of something worse," said Pierre
Ellis, senior economist with Decision Economics Inc in New
York.
That worse-than-expected jobs report could tip the balance
for the U.S. House of Representatives to vote for an historic
$700 billion rescue package for banks and other financial firms
burdened by bad mortgage-related assets, which is contributing
to a global credit crunch. An earlier attempt failed on Monday,
sending stocks careening lower.
"Realistically, the focus is on the Wells Fargo-Wachovia
deal. (US Treasury Secretary Henry) Paulson's been saying all
along he wanted to get private markets involved again," said
Justin Wiggs, equities trader at Stifel Nicolaus Capital
Markets in Baltimore.
"Also, all indications suggest (the bailout bill) is
gaining speed in the House, which is important, because if it
doesn't pass, it could get ugly," he added.
The banking merger news gave a shot of optimism to
investors that business was still getting done in the financial
industry. Wells Fargo's deal scuttled Citigroup's attempt to
buy Wachovia's banking assets for $2.16 billion in a government
brokered deal.
In the first 30 minutes of trade in New York, the benchmark
Dow Jones industrial average <> was up 141.13 points, or
1.35 percent, at 10,623.98.
The Standard & Poor's 500 Index <.SPX> was up 22.47 points,
or 2.02 percent, at 1,136.75. The Nasdaq Composite Index
<> was up 43.81 points, or 2.22 percent, at 2,020.53.
European share prices rose ahead of the U.S. market open
after the merger news and held their levels.
The FTSEurofirst 300 index <> was up 1.4 percent on
the day while MSCI main world equity index <.MIWD00000PUS>
erased earlier losses to rise 0.71 percent.
Japan's Nikkei 225 index <> fell 1.9 percent to a
three-year closing low on Friday for its worst week in more
than a year. The Wachovia deal was announced after Japan's
markets closed.
Government bonds fell on the increased risk tolerances.
Benchmark 10-year U.S. Treasuries fell 13/32 of a points in
price, pushing the yield up to 3.67 percent <US10YT=RR>.
U.S. rate futures fully price in a 50 basis point cut to
the Oct 28-29 Federal Open Market Committee meeting, to 1.5
percent -- similar expectations from late on Thursday.
In the euro zone, government bond futures pared gains as a
result of the U.S. stock market rally too. The liquid two-year
Schatz yield <EU2YT=RR>, which is sensitive to moves in equity
markets, was flat at 3.273 percent
DOLLAR RALLY
Europe's weakening economy prompted the European Central
Bank on Thursday to open the door for its first interest rate
cut in more than five years.
ECB President Jean Claude Trichet said inflation risks have
eased as financial market turbulence hit the euro zone.
A cut in Europe's benchmark interest rate would erode the
attractiveness of the euro, which fell 0.54 percent in early
New York trade to $1.3744 <EUR=>.
The U.S. dollar is on track for its biggest weekly gain in
16 years, up 0.37 percent on the day and holding near a
one-year high against a basket of major currencies <.DXY>,
A softening of the commodity markets also eased up the
negative pressure on U.S. stocks but spelled bad news for
emerging markets which derive much of their economic strength
from the export of precious metals, grains and energy.
Emerging sovereign spreads <11EMJ> widened one basis point
while emerging stocks <.MSCIEF> lost 1.31 percent, rising from
an earlier two-year low.
Spot gold prices <XAU=> fell $6.80 or 0.81 percent to
$828.20 an ounce.
U.S. light crude <CLc1> fell 0.2 percent to $93.78 a
barrel.
(Additional reporting by Ellis Mnyandu, John Parry, Nick
Olivari in New York; Ros Krasny in Chicago; Glenn Somerville in
Washington; Natsuko Waki, George Matlock in London)
