Promise of central bank support lifts world shares

By Richard Hubbard

LONDON (Reuters) - Investors seized on clear pledges of policy support from Japanese and European central banks on Tuesday to drive world shares higher, sending the yen down sharply against the dollar and boosting oil prices.

That put Wall Street on course for a higher open when trading resumes after Monday's Memorial Day holiday, reversing the trend that saw all three major stock indexes end last week in negative territory.

Heightened expectations the U.S. central bank could soon taper its stimulus programme unleashed turbulence across the markets last week, leaving it to central banks in Japan and Europe to reassure investors their liquidity taps remain open.

"There is still some nervousness, but investors are also feeling that equities are the best asset class," Keith Bowman, analyst at Hargreaves Lansdown,

Equity markets around the world hit their highest levels in many years this month due to the cheap funding from the Fed and other central banks. But the comments by Fed chairman Ben Bernanke suggesting a U.S. recovery could bring a shift in policy have made investors question prospects for further gains.

"We have had a significant move higher and now it's time for taking stock and deciding whether we continue to go higher or we are due a correction," Michael Hewson, senior market analyst at CMC Markets said.

The question is being asked most about the Japanese market, where the Nikkei stock index had reached a 5-1/2-year high before dropping 7.3 percent last Thursday - its largest one-day loss since the March 2011 earthquake and tsunami.

The Nikkei steadied on Tuesday, ending 1.2 percent higher after long-serving board member Ryuzo Miyao said the Bank of Japan would fine-tune market operations to ensure its unprecedented easing campaign is not derailed.

European Central Bank officials also weighed in to help ease investor's nerves, sending the broad FTSE Eurofirst 300 index up 1.25 percent by midday, its best day in a month.

ECB Executive Board member Peter Praet said the bank could still cut interest rates further to stimulate the economy if needed. His comment echoed that of ECB Executive Board member Joerg Asmussen on Monday who said the loose policy would stay as long as necessary.

Tuesday's rebound took Germany's DAX up 1.2 percent to near recent record highs. In London, the FTSE 100 index was up 1.6 percent, led by banking stocks.

MSCI's world equity index had risen 0.4 percent by mid-morning, reversing four days of losses.

SAFETY ABANDONED

The dollar rose 1.0 percent to 102.00 yen, up more than a full yen from a two-week low of 100.66 hit on Friday. While against the Swiss franc, another currency seen as a safe haven, the dollar up 0.5 percent to 0.9675 francs.

"The yen and Swiss franc have dropped noticeably this morning, essentially because risk assets seem to be stabilising," said Societe Generale currency strategist Alvin Tan.

The euro was little changed at $1.2940 against the dollar, trading well within its recent range of $1.28-1.32.

Investors also turned away from German government bonds though the talk of future ECB rate cuts lent support. The yield on the 10-year bond was flat at 1.43 percent.

The rally in equity markets and signs of rising Middle East tension lifted oil prices sharply. U.S. crude futures gained 0.8 percent to $94.78 a barrel and Brent rose 1.5 percent to $104.16 a barrel.

"Oil has made gains today on the back of friendly equity markets," said Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.

(Additional reporting by Atul Prakash and Anooja Debnath. Editing by Catherine Evans, John Stonestreet, Ron Askew)