World stocks gain on encouraging data, Swiss franc drops

US and European stocks climbed more than 2 percent, reversing course after steep losses in the previous session. The US economic data and corporate results provided respite from the attention on overnight fears about the health of the euro zone banking system.

But the sanguine view in the equity market contrasted with nervousness in the short-term funding markets, where there were tangible signs of concern. Fears over the health of French banks intensified European banks' scramble for dollars, driving up their dollar borrowing costs to levels not seen since the 2007-2009 global credit crisis.

Nonetheless, markets were on edge after banking sources told Reuters that one bank in Asia had cut credit lines to major French lenders while others in the region were reviewing trades and counterparty risks due to concerns about the exposure of French banks to peripheral euro zone bonds.

US initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 395,000 last week, the lowest level since early April and below economists' forecasts of 400,000.

Analysts cautioned that one week was not enough to show definitive improvement in the struggling labor market, but the better-than-expected data was a welcome surprise.

"Had we seen a jump (in claims) it would have reinforced recession fears. What we've seen here is not anything to allay those fears, but just to set them aside temporarily," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

The anemic pace of US growth in the first half of the year has fueled worries of another recession, and analysts are eager to see signs the recovery could pick up steam in the rest of 2011.

The dollar and euro soared more than 5 percent versus the Swiss franc after the Swiss National Bank said it could ease monetary policy further. Markets focused on the possibility of a temporary peg between the franc and the euro to rein in a soaring currency.

The MSCI world equity index gained 1.3 percent, changing course after early losses, and the pan-European FTSEurofirst 300 provisionally closed up 2.6 percent.

The Dow Jones industrial average gained 249.90 points, or 2.33 percent, at 10,969.84. The Standard & Poor's 500 Index was up 29.09 points, or 2.60 percent, at 1,149.85. The Nasdaq Composite Index was up 65.87 points, or 2.77 percent, at 2,446.92.

Wall Street was also boosted by a surge in Cisco Systems the day after it forecast a modest increase in current-quarter revenue, following months of uncertainty surrounding its business. Cisco was up more than 16 percent.

Gold slid from record highs as investors cashed in recent gains and after CME Group said it was hiking margins for trading COMEX gold futures. Spot gold was down 1.8 percent at $1,762.39 an ounce

The euro was last up 5.7 percent at 1.0889 francs, compared with a record low of 1.0075 set as recently as Tuesday, as investors flocked to safety from slumping stocks.

NERVOUS MARKETS

Societe Generale, at the center of Wednesday's storm that took its shares down more than 20 percent at one point, rose 3.5 percent, while BNP Paribas edged up 0.2 percent.

"We're being driven by the news flow out of Europe, and until we get clarity, it's hard to get much traction. At the same time, we're also very oversold," said Art Hogan, managing director of Lazard Capital Markets in Boston.

"When we hear of steps being taken to address the situation the market catches a bit of a bid, but then other news will come out and we sell off. Volatility is really the word of the week."

In the credit markets, the cost of insuring French bank debt hit new records, reflecting worries about the health of those banks, which are heavily exposed to troubled euro zone sovereign debt. It pulled back a bit as European markets closed.

Societe Generale's CDS costs were last up 8 basis points on the day to 342 basis points, after earlier trading as high as 383 basis points, Markit data show.

That means it would cost 342,000 euros per year for five years to insure 10 million euros in debt. This cost has more than doubled in the past two weeks.

BNP Paribas' CDS costs were little changed on the day at 236 basis points, after earlier rising to 256 basis points, and are up from 110 basis points in early July. Credit Agricole's swap costs last traded at 271 bps, up from 130 basis points in early July, Markit data show.

US government bonds fell sharply in volatile trade. The 30-year Treasury bond fell two points in price before midday in the New York session. It was last 1-14/32 lower in price and yielding 3.58 percent, up from 3.52 percent at Wednesday's close.

The benchmark 10-year Treasury note was yielding 2.22 percent, up from the 2.14 percent high yield at Wednesday's well-received auction.

Copyright Reuters, 2011