Global stocks rally sharply as credit market calms

The U.S. dollar -- which had also received some safe-haven demand over the past week -- also eased back.

"There's a bit of a stabilization all round, but still far from recouping the losses we saw last week," said Tobias Thygesen, Senior Analyst at Danske Bank.

"If there are continuing signs that credit markets are calming down a bit, we might see another day of stabilization, but renewed credit concerns could spark risk aversion again."

WALL ST LEADS THE RALLY

Tuesday's bounce took its cue from New York's surge late on Monday. The S&P 500 index of leading U.S. shares closed more than one percent higher on Monday as optimism about earnings resurfaced and edgy credit markets were soothed.

With a stream of U.S. economic data due out later on Tuesday, including the Federal Reserve's favored measure of inflation -- the core personal consumption expenditure price index, S&P futures indicated a steady to firmer open.

The credit market recovery, meantime, was helped after Monday's smooth announcement about the shutting down of Boston-based hedge fund Sowood Capital, which had been hammered by subprime mortgage losses.

The mood was further aided when a home lending unit of GMAC reported narrower losses and Standard & Poor's credit rating firm upgraded Morgan Stanley's debt.

"Some of the concerns about subprime have been put to rest," said one European credit derivatives trader on Tuesday, referring to the strong recovery in the iTraxx.

U.S. earnings optimism was also underlined as expectations for quarterly earnings growth by S&P 500 firms were raised to 6.8 percent from 6.0 percent, according to Reuters Estimates.