World stocks rally after volatile week as trade fight quiets

By Laila Kearney

NEW YORK (Reuters) - World stocks rallied on Friday, with Wall Street seeing its biggest gains in three weeks and European indexes recovering from a volatile week pegged to a growing U.S trade battle with other top global economies.

Bank shares <.SPXBK> jumped after U.S. lenders cleared the second part of the Federal Reserve's stress test, sending the sector 1.2 percent higher after it broke a 13-day losing streak on Thursday, and helping U.S. stocks to recover some losses.

Wells Fargo led the gains, surging 4.6 percent, while Citigroup , M&T Bank and a host of other banks were up 1 percent or more.

Nike also pushed U.S benchmark indexes higher after the world's largest sneaker maker surged as much as 12 percent to a record peak on a strong earnings report.

The Dow Jones Industrial Average rose 204.63 points, or 0.85 percent, to 24,420.68, the S&P 500 gained 17.48 points, or 0.64 percent, to 2,733.79 and the Nasdaq Composite added 41.61 points, or 0.55 percent, to 7,545.29.

MSCI's gauge of stocks across the globe gained 0.94 percent.

A lack of new details about the worsening of the United States' trade tensions with China and the European Union likely guarded against a global equities selloff on the day, investors said.

"It has not been a huge news day in the U.S., probably some of it (market gains) is a snap back based on the recent down markets that we've had," said Curtis Holden, senior investment officer at Tanglewood Total Wealth Management.

Earlier, the U.S. stock market briefly dipped on a report by the Axios news website that indicated President Donald Trump was keen for the U.S. to withdraw from the World Trade Organization; the market recovered after Treasury Secretary Steven Mnuchin told Fox Business Network the report was wrong. The Axios report cited people involved in talks with Trump.

The market's wobbling was a reminder of heightened investor sensitivity to trade-related remarks or developments.

"The markets are very much subject to headlines on trade and tariffs," said Peter Cecchini, chief market strategist at Cantor Fitzgerald in New York.

"They are important from the standpoint that trade globalization has been the cornerstone for growth and when you do something to sort of undermine that cornerstone, that's a reasonable reason for concern."

The U.S. administration is due to impose tariffs on Chinese goods worth $34 billion beginning July 6, likely prompting a tit-for-tat response from Beijing.

In Europe, the brief break from trade fighting, as well as a deal struck by EU leaders on immigration, also helped sentiment and triggered a jump in the euro.

The pan-European STOXX 600 <.STOXX> was up 0.8 percent at its close, while Germany's trade-sensitive DAX <.GDAXI> jumped 1.1 percent.

While Asian stocks also rose, the Chinese yuan suffered its worst month on record, losing 3 percent against the dollar in June as investors pulled money from a market likely to suffer from higher barriers to trade.

The U.S. dollar slipped to a three-day low against the euro after European Union leaders reached an agreement on migration that eased pressure on German Chancellor Angela Merkel, but the greenback remained on track to log its best quarterly performance in six quarters.

The yield curve between two-year and 10-year U.S. notes flattened to 31 basis points, the flattest since 2007, after U.S. consumer spending data disappointed some analysts' expectations. Some investors see its flattening as a sign recession may be around the corner.

Oil prices extended gains to fresh highs on a tighter market as U.S. sanctions against Iran threatened to remove a substantial volume of crude oil from world markets amid rising demand. [nL4N1TV1DQ]

U.S. crude futures settled up 0.95 percent at $74.15 per barrel. Brent was last at $79.44, up 2.04 percent on the day.

(Additional reporting by Helen Reid in London, Amy Caren Daniel, Karen Brettell in New York; Editing by Bernadette Baum and Chizu Nomiyama)