*Global stocks rally, dollar gains on European weakness
*U.S. House of Representatives starts vote on bailout
*Wells Fargo buying Wachovia for $16 bln
*U.S. job rolls suffer deepest cut in 5-1/2 years in Sept
(Releads, updates Wells-Wachovia deal, prices, US data)
By Daniel Bases
NEW YORK, Oct 3 (Reuters) - The purchase of troubled bank
Wachovia Corp by Wells Fargo and the anticipated passage of a
$700 billion U.S. financial rescue package set off a rally in
global stock markets on Friday as investors shrugged off the
biggest drop in U.S. payrolls in 5-1/2 years.
The worse-than-expected September jobs report and data
showing weak growth in the dominant U.S. service sector last
month could tip the balance in favor of the U.S. House of
Representatives passing the historic package.
"There's no doubt that the huge market decline on Monday
caused fear in lawmakers. The bad economic data we've been
getting has made House members realize that things are already
very bad and could get much worse," said John Praveen, chief
investment strategist at Prudential International Investments
Advisers in Newark, New Jersey.
"I think they're more inclined to vote yes this time.
There's a realization that this is not a Wall Street bailout
but a Main Street rescue," he said.
An earlier attempted to pass the bill meant to underpin
banks and other financial firms staining under bad
mortgage-related assets failed on Monday, sending stocks
careening lower.
A deteriorating financial backdrop in Europe is giving a
sustained lift to the U.S. dollar even as America's economy is
working its way through the financial turmoil and economic
slowdown.
It was Wells Fargo's <WFC.N> offer to buy Wachovia <WB.N>
in a deal valued at roughly $16 billion that set alight stocks
in Europe and the United States. Asia's main stock markets had
closed with losses before the deal was announced.
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 stocks, the benchmark Dow Jones industrial average
<> was up 213.93 points, or 2.04 percent, at 10,696.78. The
Standard & Poor's 500 Index <.SPX> was up 28.55 points, or 2.56
percent, at 1,142.83. The Nasdaq Composite Index <> was up
53.33 points, or 2.70 percent, at 2,030.05.
European share prices closed with solid gains. The
FTSEurofirst 300 index closed up 3.01 percent on the day. On
the week, the index lost 1.4 percent. MSCI's main world equity
index erased earlier losses to rise 1.66 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.
GRIM ECONOMIC DATA
As the world has focused on events in the U.S. Congress,
America's economy is showing more signs of a slowdown.
On Friday the Labor Department reported a loss of 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. The
unemployment rate held at a five-year high of 6.1 percent.
"We've seen weaker data in history, but these look pretty
decisively to be the beginning of something worse," said Pierre
Ellis, senior economist at Decision Economics Inc in New York.
A second gloomy piece of economic data showed America's
dominant service sector economy barely grew in September.
The Institute for Supply Management's non-manufacturing
index came in at 50.2, marginally above the level of 50 that
signals expansion, with the help of a slight rise in new
orders. The index was 50.6 in August.
Government bonds, which usually benefit from grim economic
data were overtaken by events and fell as stock prices rose.
Benchmark 10-year U.S. Treasuries fell nearly 1 point in
price, pushing the yield up to 3.74 percent.
U.S. rate futures nearly price in a 50 basis point cut to
the Oct 28-29 Federal Open Market Committee meeting, to 1.5
percent. Expectations has slipped a bit since late Thursday.
Euro zone government bond gains were wiped out by the stock
market rally. The two-year Schatz yield was up 1.1 basis points
at 3.321 percent <EU2YT=RR>.
DOLLAR RALLY
The U.S. dollar remained on track for its best weekly gain
against a basket of currencies in 16 years on Friday while its
performance against the euro this week could be the best since
its creation after the European Central Bank opened to the door
to interest rate cuts on Thursday.
ECB President Jean Claude Trichet said inflation risks have
eased as financial market turbulence hit the euro zone economy.
A cut in Europe's benchmark interest rate would erode the
attractiveness of the euro, which fell 0.08 percent at $1.3805
from a previous session close of $1.3816 <EUR=>.
The U.S. Dollar Index <.DXY> is up 0.03 percent, holding
near a one-year high against a basket of major currencies,
Emerging sovereign spreads narrowed 7 basis points <11EMJ>
while emerging stocks lost 0.93 percent <.MSCIEF>, rising from
an earlier two-year low.
Gold prices fell $1 or 0.12 percent to $834 an ounce
<XAU=>.
U.S. light crude rose $0.78 to $94.75 a barrel <CLc1>.
(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)
