* MSCI world equity index rises 2.2 percent to 308.63
* U.S. govt working on plan to deal with toxic assets
* European stocks soar, driven by banking stocks; dollar up
By Carolyn Cohn
LONDON, Sept 19 (Reuters) - The dollar rose and European
stocks soared on Friday, propelled by huge gains in banking
stocks as the U.S. government considered a comprehensive plan to
deal with toxic bank assets.
U.S. Treasury Secretary Henry Paulson and Federal Reserve
Chairman Ben Bernanke intend to work through the weekend on a
plan to deal with mortgage-related assets that are choking the
financial system. []
Hopes that the plan will sort out some of the problems of
U.S. and UK banks drove Barclays <BARC.L>, which is buying some
of Lehman Brothers' assets, up as much as 39 percent. Shares in
HBOS <HBOS.L> climbed 39 percent and its new owner Lloyds TSB
<LLOY.L> rallied 26.1 percent.
"At present, confidence is the most important factor and
this will only be maintained if the rescue plans are delivered
on both sides of the Atlantic," said Andrew Turnbull, senior
sales manager at ODL Securities.
UK banking shares also got a boost after UK regulators
slapped a temporary ban on short selling of banking stocks.
The FTSEurofirst 300 index <> jumped over 5 percent,
and the MSCI main world equity index <.MIWD00000PUS> rose 2.28
percent to 308.47.
The dollar rallied more than 1 percent against the euro to
$1.4169 <EUR=> and nearly 2 percent against the yen to 107.68
<JPY=>.
Safe haven government bonds fell on news of the U.S. plan,
which congressional aides said could include proposals similar
to the Resolution Trust Corp, set up to clean up bad debts from
the savings and loan crisis in the late 1980s.
Euro zone government bond futures <FGBLc1> dropped more than
a full point, in line with weaker U.S. Treasuries.
Meanwhile, emerging markets staged a comeback, helped partly
by local government measures.
The MSCI emerging equities index <.MSCIEF> rose 6 percent,
after plumbing its lowest in more than two years on Thursday,
while emerging sovereign debt spreads <11EMJ> squeezed in by 29
basis points to 390 bps over U.S. Treasuries.
The Chinese government said it would buy shares in three of
the biggest state-owned banks and ditched a tax on stock
purchases.The measures helped propel Shanghai's composite index
<> up 9.5 percent.
Russian anti-crisis measures drove the MICEX <> and RTS
<> stock markets up 23 and 15.5 percent respectively, after
a 1-1/2 day trading halt earlier this week on sliding markets.
Central banks in the United States, Europe, Japan and
elsewhere have injected massive amounts of liquidity into money
markets, culminating in a coordinated offer on Thursday of $180
billion in funding.
However, the one-month yield on U.S. Treasury bills
<US1MTY=RR> was still close to zero, reflecting heavy demand for
short-term liquidity.
The overnight U.S. dollar lending rate has eased but was
still volatile, trading between 2 percent and 5 percent
<USDOND=>.
The spread between 30-day AA-rated commercial paper and
A2/P2 non-financial commercial paper hit 280 bps, twice the size
of a spike in late 2000 which prompted a surprise U.S.
half-point inter-meeting rate cut, according to Morgan Stanley.
"The evidence is clearly that the central banks have not
regained authority over the financing markets as yet," the bank
said in a client note.
"They still have dry powder -- much more money can be
injected, moral suasion can be used to make the banks lend, and
official rate cuts remain open."
Gold <XAU=> dropped over 2 percent to $831.25 on the firm
dollar, but U.S. crude oil futures <CLc1> rose as much as $2 on
growing U.S. and Nigerian supply concerns before easing to
$99.11 a barrel.
(Additional reporting by Atul Prakash, editing by Patrick
Graham)
