* Investors edge away from pure safety trades, but cautious
* Credit markets tense, banks seeks confidence
* Asian stocks higher
* Investors want Washington to take action
By Kevin Plumberg
HONG KONG, Oct 1 (Reuters) - Stocks in Japan and Australia
bounced higher on Wednesday and the yen steadied as investors
edged away from safety plays on hopes that a salvaged Wall
Street rescue plan in Washington could keep global equities
rallying.
U.S. political drama over a $700 billion plan for the
government to buy illiquid securities has whipsawed markets,
but expectations that Congress will pass something soon drove a
5.3 percent rally in the S&P 500 stocks index overnight,
erasing more than half of Monday's market plunge.
In another sign that willingness to take risks has returned
as the final quarter of 2008 opens, the yield on 1-month U.S.
Treasury debt <US1MT=RR> climbed 17 basis points to 1.75
percent. The yield had briefly turned negative last month as
investors stashed money into very liquid, short-maturity U.S.
government debt to wait out a massive reduction in risk taking.
Still, money markets reflect a nagging reluctance by banks
to lend to each other, which is clogging up the flow of credit.
Europe's banking industry is under fire after a second bank
had to be rescued. And, even if a deal is brokered in
Washington, it is not clear it would do much to stimulate the
U.S. economy.
"Even though the bailout now appears likely to pass,
there's still a lot of unknowns about it, and then it has to
actually be carried out," said Hideyuki Ishiguro, a supervisor
in the investment strategy department of Okasan Securities in
Tokyo.
Japan's Nikkei share average <> climbed 1.3 percent on
Wednesday after posting its biggest monthly decline in 8 years
in September. Shares in Canon <7751.T> rose 4.7 percent.
The stock gains pushed down 10-year Japanese government
bond futures <2JGBv1> to a 2-month low, off more than a full
point to 136.39.
Australia's benchmark S&P/ASX 200 share index rose more
than 3 percent but is not far above its lowest since November
2005, hit only two weeks ago. Many Asian markets were closed
for holidays, including China, Hong Kong and Singapore.
In a sign of how volatile markets remain, the Dow Jones
industrial average <> rose 4.68 percent on Tuesday in its
best day for six years, a day after its biggest fall since just
after the 1987 stock market crash.
The U.S. dollar was steady against the yen at 105.85 yen
<JPY=>, and the euro was up 0.2 percent to 149.90 <EURJPY=>.
The dollar briefly touched a 4-month low against the yen on
Tuesday, but later surged across the board on a combination of
U.S. investors bringing money back home from overseas
investments and optimism about the U.S. bailout plan in
Congress.
The U.S. Senate agreed to vote on the financial rescue
package on Wednesday night that will include a sharp increase
in the amount of bank deposits insured by the federal
government. []
The euro <EUR=> was down 0.1 percent at $1.4105 after the
15-nation currency dropped 2 percent overnight.
European countries scrambled to support the banking system,
struggling under the weight of collapsed confidence and
sluggish lending conditions. France joined Belgium and
Luxembourg to inject 6.4 billion euros ($9 billion) into Dexia
<DEXI.BR>, while the Irish government backed all its banks,
covering up to 400 billion euros in deposits.
"The recent interventions are likely to weaken European
government balance sheets, which would be a negative in the
long-term," said Ashley Davies, UBS currency strategist in
Singapore, in a note to clients.
Meanwhile, short-term money markets continued to reflect
elevated levels of stress. On Tuesday, the spread of 3-month
London interbank offered rates over overnight index swap rates
widened to records in dollars, sterling and euros.
The spread is critical in determining credit market
conditions because it reflects the premium the market demands
over anticipated benchmark central bank interest rates.
Focus among investors will be whether these signs, which
suggest the financial crisis is far from over, will douse a
rally in global stock markets.
The unwinding of trades based on fear about the impact of
the financial crisis on the global economy pushed up oil
prices, with U.S. light crude for November delivery <CLc1>
rising 81 cents to $101.45 a barrel.
Spot gold <XAU=> gained 1 percent to around $879 an ounce
after dropping 4 percent in New York in its biggest one-day
percentage fall since August.
Generally, panic has turned to tense caution rather than
any full-blown hope for recovery.
"There is a strong belief that the U.S. Congress will pass
the rescue plan in a few days, so that's supporting prices,"
said Ryuichi Sato, analyst at Mizuho Corporate Bank in Tokyo.
"But the fundamentals for U.S. financial markets haven't
changed so there is still a lot of downside risk."
