NEW YORK (Reuters) – World stocks jumped and the dollar fell on Tuesday as dismal U.S. data spurred hopes the Federal Reserve may offer more economic stimulus.
Financial markets have been in turmoil over the past month on concerns the United States may be headed for another recession and as the euro zone's debt crisis has worsened.
World stocks, as measured by the MSCI All-Country World Index, and Wall Street's benchmark Standard & Poor's 500 index are on track for their worst month since 2008, after the collapse of Lehman Brothers.
The MSCI All-Country World Index jumped 1.7 percent, while the S&P 500 gained more than 2 percent. Data from China showing factory sentiment was not as weak as expected helped boost world shares overnight.
In the latest disappointing news on the U.S. economy, factory output in the U.S. central Atlantic region contracted again in August and new home sales fell to a five-month low in July.
Equity investors are taking a "bad news is good news" approach, though, betting that the data may spur more action from the Fed. Stocks staged a rally in the fourth quarter of last year, when the Fed announced a $600 billion bond-buying program.
"People are putting money on the Fed saying something and buying stocks ahead," said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco.
There is concern, however, that investors are overly optimistic, and many strategists have noted the U.S. economy has improved since a year ago.
Speculation is widespread in financial markets that Fed Chairman Ben Bernanke will use his Friday speech at a central banker conference in Jackson Hole, Wyoming, to signal a new monetary offensive to support a faltering U.S. economy.
Bernanke, however, is most likely to outline gradualist measures, which would disappoint those looking for a big bang approach such as a fresh round of bond buying, known as QE3.
"The market is really geared up for the idea of additional asset purchases to at least be put on the table when Bernanke speaks," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. "I'm not sure it will play out that way, but that's what the market is betting on now."
The Fed chairman looks set to discuss ways the central bank could tweak the Fed's balance sheet as a means to put further pressure on medium and long-term interest rates and anchor them at low levels. These could be implemented in September and October at coming Fed meetings.
On Wall Street, the Dow Jones industrial average was up 198.71 points, or 1.83 percent, at 11,053.36. The Standard & Poor's 500 Index was up 23.00 points, or 2.05 percent, at 1,146.82. The Nasdaq Composite Index was up 62.63 points, or 2.67 percent, at 2,408.01.
Gold prices fell 2 percent, sharply retreating from a record of more than $1,900 an ounce in Asia trading, as a broad recovery in equity markets and riskier assets took the steam out of a bullion surge that many saw as overdone.
Spot gold was down 2.4 percent at $1,851.29 an ounce
Stimulus measures like those previously undertaken by the Fed increase the amount of dollars in the system, driving down the currency's value, which helps U.S. exports, and prompting investors to seek higher returns elsewhere.
The dollar edged down 0.3 percent against a basket of currencies.
Bonds, which normally move inversely to stocks, saw some light buying after the weak data on speculation the Fed will act to spur the economy, but the strength in equities appeared to be keeping a lid on their rally.
The benchmark U.S. 10-year note was up 2/32 in price, its yield edging down to 2.106 percent from 2.11 percent late on Monday.
In the oil market, prices bounced in choppy trading, supported early by the manufacturing data from China and Europe. Brent October crude rose 71 cents to $109.07 a barrel.
BANK BORROWING COSTS HIT
Ongoing fears of European banks' exposure to heavily indebted European nations like Greece and Italy are making it more expensive for banks to fund themselves in short-term funding markets.
U.S. bank debt costs are also being pressured in unsecured bond markets. The cost for interbank borrowing -- measured by three-month Libor, or the London interbank offered rate -- rose to 0.31178 percentage point on Tuesday.
European banks are facing higher dollar funding costs as U.S. money fund investors, nervous about exposures to peripheral euro zone countries, reduce the length and amount of loans to banks in the region.
The Thomson Reuters Peripheral Euro Zone Banks Index ended down 1.1 percent at 51.61 and is down 25 percent year-to-date.
(Reporting by Caroline Valetkevitch; Additional reporting by Ashley Lau, Steve Johnson, Frank Tang and Emily Flitter in New York and Jan Harvey in London; Editing by Leslie Adler)
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