* Global stocks rally on AIG bailout; Europe volatile
* Interbank lending rates remain high
* Commodity prices rise, yen under pressure
By Sitaraman Shankar
LONDON, Sept 17 (Reuters) - Global stocks rallied on
Wednesday after a bailout of cash-strapped insurer AIG halted a
two-day equities fall, but interbank lending rates stayed high
and U.S. share futures weakened, suggesting the recovery was
transient.
Oil jumped $3, government bond prices fell and the
low-yielding yen came under pressure after the $85 billion
rescue package for American International Group <AIG.N> eased
some of the fears gripping markets.
Better than expected results from Goldman Sachs <GS.N> and
Morgan Stanley <MS.N> also helped, though the Federal Reserve
kept rates on hold at its Tuesday meeting against some
expectations of a cut.
European shares were up 0.9 percent, underperforming gains
in Asia and the United States, with trade volatile and the
FTSEurofirst 300 <> benchmark fluctuating between 0.9
percent lower and 1.8 percent higher.
Underlining the skittish nature of the recovery, shares in
British bank HBOS <HBOS.L>, the focus of funding concerns,
plummeted more than 50 percent, but then traded 21 percent
higher as a source said that it was in merger talks with Lloyds
TSB <LLOY.L>. The two banks declined to comment.
Analysts said the AIG bailout had given markets breathing
space, but little else.
"For investors, the only near-term certainty is further
volatility," said Paul Niven, Head of Asset Allocation at F&C
Investments.
"While equities offer good value at current levels,
we do not believe that investors are yet being compensated
sufficiently for the risk which still remains, and the
further failures and write-downs which will continue to
emerge," he said.
The MSCI World stocks index <.MIWD00000PUS> traded up 0.4
percent after falling nearly 5 percent over the first two days
of a week that changed the face of the U.S. banking sector, with
Lehman Brothers <LEH.P> filing for bankruptcy protection and
Merrill Lynch <MER.N> being bought by Bank of America <BAC.N>
for $50 billion.
On Wednesday, the bank-to-bank cost of borrowing overnight
dollars fell but the premium paid for the greenback and sterling
over three months swelled, showing persistent money market
strain.
"People are scared of further financial institution
difficulty. Funding remains difficult and flows of
risk-sensitive capital have slowed considerably," said Patrick
Bennett, Asia foreign exchange and interest rates strategist
with Societe Generale in Hong Kong.
U.S. index futures <SPc2> <DJc2> <NDc2> were 0.2-0.7 percent
lower, suggest a weaker Wall Street open.
Russian stock market trading was suspended until at least
1300 GMT as the markets watchdog asked the country's biggest
exchanges to come up with proposals to calm plunging prices.
BREATHING EASIER
Prices of U.S. Treasuries lost ground and the low-yielding
yen fell against the euro, reflecting some easing in risk
aversion.
Yields on the U.S. 10-year Treasury note <US10YT=RR> climbed
to 3.57 percent from 3.44 percent, and the yen, which is used to
fund trades in riskier but traditionally higher-yielding assets
like equities, fell 1 percent against the euro.
Emerging sovereign debt spreads <11EMJ> narrowed by 16 basis
points to 400 basis points over U.S. Treasuries, after hitting
their widest levels in nearly four years on Tuesday. Benchmark
emerging equities <.MSCIEF> rose 1.8 percent, after hitting
October 2006 lows on Tuesday.
Commodity prices rallied, led by oil. U.S. light crude
futures <CLc1> rose $3.3 to $94.48 a barrel after hitting a
seven-month low on Tuesday. Gold steadied after the previous
day's $3 fall.
(Additional reporting by Kevin Plumberg in Hong Kong, Carolyn
Cohn and Mike Dolan in London; editing by Stephen Nisbet)
