Stocks and euro rise; focus on Slovakia

LONDON: World stocks and the euro hit 3-week highs on Wednesday while top-rated government bonds fell as investors looked to Slovakia to reach a deal on expanding the euro zone's rescue fund, enabling leaders to intensify efforts to tackle a debt crisis.

German Chancellor Angela Merkel also voiced confidence, saying she was certain that by the time of the European Union summit on Oct. 23 there would be full ratification of the European Financial Stability Fund (EFSF) .

Germany and France have promised to come up with a comprehensive plan to fight a crisis that has dominated markets' thinking this year and prompted fears of turmoil to rival that when Lehman Brothers collapsed in 2008.

After an initial rejection on Tuesday, Slovakia's political parties will hold talks later to reach an agreement on a plan to give the EFSF bigger powers to fight the crisis. A new vote could be held as soon as Thursday.

Investors are also looking to the European Union to announce a bank recapitalisation plan due later on Wednesday, designed to cushion the impact of a possible default by Greece on the region's banks.

"Markets are clearly still hoping for a comprehensive plan to tackle the (euro zone) debt crises. This may continue to support the market over the next couple of months," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.

"In Slovakia, a 'yes' vote may follow shortly. However, it once again demonstrates how difficult a democratic decision process with 17 members (of the euro zone bloc) may be."

The MSCI world equity index erased initial losses to gain 0.7 percent. The benchmark index is now 11 percent above a 15-month low hit earlier in October.

European stocks rose 0.7 percent to a five-week high while emerging stocks rose 1.3 percent, thanks to a rebound in Chinese shares.

"I can see how people might say it's not as bad as some were fearing a few weeks ago. A lot of economic indicators are suggesting that things are ticking along," said Bill Dinning, at Kames Capital in Edinburgh, which has 48.8 billion pounds ($76 billion) under management.

"But I'm struggling to be optimistic. It's still a low growth environment. If there were some kind of credible policy announcement in Europe, that would do a lot for sentiment."

US stock futures were up 0.7 percent, pointing to a firmer open on Wall Street later after Alcoa kicked off the third-quarter earnings season on a weak note on Tuesday.

US crude oil rose 0.3 percent to $85.53 a barrel.

The euro gained 1.1 percent to $1.3800. The dollar fell 0.8 percent against a basket of major currencies.

Bund futures erased early gains to fall 73 ticks after the German auction of 1.625 billion euros of 30-year bonds drew less bids than the amount on offer, with demand below the average at long-term auctions this year.

Before the German auction, the ECB said it lent banks $1.35 billion, a fifth of the demand forecast in a Reuters poll of money markets traders early this week. Only 6 banks bid for the three-month funds, easing some concerns that European banks were facing acute problems accessing dollars in the market.

Copyright Reuters, 2011