World stocks rally as Putin's comments ease tensions

By Richard Leong and Herbert Lash

NEW YORK (Reuters) - Stocks and other risky investments, including battered Russian assets, rallied on Tuesday after Russia's president said he saw no need to use military force in Crimea for now, remarks that investors saw as intended to ease tensions over Ukraine.

President Vladimir Putin delivered a robust defense of Russia's actions in Crimea, but he also sought to ease East-West tension over fears of war in the former Soviet republic. His comments reversed most of the markets' moves on Monday.

The rouble strengthened 1.2 percent to 36.07 to the dollar as Russian stocks <.MCX> jumped 5.3 percent, recouping almost half of the previous day's losses.

Putin told a news conference that Russia's use of force in Ukraine would be a choice of "last resort" and that sanctions being considered against Moscow by the West would be counter-productive.

Putin's remarks did not quell criticism from President Barack Obama, who said Russia's aggression in Ukraine is not a sign of strength. U.S. Secretary of State John Kerry, speaking from Kiev, said Moscow was looking for a pretext to invade further into its neighbor.

As investors moved back into stocks, they unwound safe-haven positions in gold, the yen, and U.S. and German government debt. Oil prices fell as Putin's gesture reduced the chances that energy supply from Russia, the No. 2 world oil exporter, could be disrupted or subject to sanctions.

"In the short term, the market always over-reacts," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh. "We got marginally good news today, but we don't know what's going to happen tomorrow."

Forrest said she expects volatility to return to the market as the situation in Ukraine remains fluid.

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Despite uncertainties over Putin's next move and how the United States and Europe will respond, Wall Street stocks surged, outpacing Monday's losses. The benchmark S&P 500 index rallied more than 1 percent, hitting a new intra-day high before paring gains modestly to set a record closing high.

European stocks also rose, with the pan-European FTSEurofirst 300 index closing at 1,344.83, up 2 percent, making up more than half of Monday's drop and staging its biggest one-day gain in nine months.

MSCI's all-country world stocks index , which tracks stocks in 45 countries, rose 1.3 percent to 410.15, wiping out Monday's drop and reaching its highest level since late 2007.

On Wall Street, The Dow Jones industrial average rose 227.85 points or 1.41 percent, to 16,395.88, the S&P 500 gained 28.18 points, or 1.53 percent, to 1,873.91, and the Nasdaq Composite added 74.671 points, or 1.75 percent, to 4,351.972.

Safe-haven government debt on both sides of the Atlantic retreated, driving yields higher as demand for low-risk assets waned. The yields on 10-year U.S. Treasuries and German Bunds rose 8 basis points and 4 basis points to 2.69 percent and 1.60 percent, respectively.

"Respite with the Russia-Ukraine situation is taking some of the flight-to-quality bid out of the (U.S.) Treasury market," said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey.

Earlier in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan rose nearly 0.2 percent and Tokyo's Nikkei <.N225> closed 0.5 percent as some foreign investors scooped up battered shares.

In currency markets, the euro gained 0.8 percent against the yen, to 140.459 yen, and held steady versus the dollar at $1.3737. It recovered against the Swiss franc, another safe-haven currency, up 0.5 percent at 1.2188 francs.

"Given three days' worth of bad headlines, I think the market was just willing to take any sort of stability it can get," said Geoffrey Yu, a strategist with UBS in London.

Gold, another traditional safe haven, fell after rallying nearly 2 percent on Monday. Spot prices on the precious metal were last down 1 percent at $1,335.98 an ounce.

Brent crude finished down $1.90, or 1.71 percent, at $109.30 per barrel, while U.S. oil futures settled down $1.59, or 1.52 percent, at $103.33 a barrel.

(Additional reporting by Rodrigo Campos and Marina Lopes in New York, and Alistair Smout in London; Editing by Dan Grebler and Leslie Adler)