Global stocks rally sharply as credit market calms

Europe's benchmark index rebounded after five straight days of losses and gained more than one percent in the first few minutes of trading. Bourses in London, Frankfurt and Paris added 1 percent or more.

The more buoyant mood was rooted in a calming of credit insurance markets, where the cost of insuring against default had exploded to record levels over the past week on concerns about distressed investments in U.S. subprime mortgages.

The iTraxx Crossover index, the most widely watched indicator of European credit sentiment and made up of mostly junk-rated credits, fell to as low as 400 basis points early on Tuesday from about 450 basis points on Monday.

That index of insurance costs from the derivatives market had soared as high as 505 basis points on Monday.

"It shows that the worst has gone, but whether it's totally over is difficult to say," said Thierry Lacraz, a European strategist at Pictet & Cie.

The calmer mood was reflected across financial markets.

The MSCI index of world stock markets, which had lost more than 6 percent over the previous 10-days, was up 0.6 percent early in Europe.

The premium emerging market governments need to pay over U.S. Treasury borrowing costs fell to 216 basis points from as high as 230 basis points on Monday, according to JP Morgan's EMBI+ index.

Benchmark government bond yields, which had fallen in recent days as investors sought the relative safety of top-rated government securities, climbed again.