Stocks around the world bounced back sharply on Tuesday as volatile credit markets stabilized and after Wall St took heart from still-brisk corporate earnings growth and the smooth wind-up of another troubled hedge fund.

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.

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.


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.

Most Asian bourses followed Wall St higher. MSCI's index of Asia-Pacific stocks excluding Japan rose 1.84 percent.

The notable exception was Japan's Nikkei 225 index, which dipped 0.2 percent on some weak corporate results and political uncertainty after an upper house election defeat for the government at the weekend.

Investors are finding it difficult to make moves because of earnings. More than 200 companies are set to report results on Tuesday, said Tsuyoshi Segawa, strategist at Shinko Securities.

In Europe, budget airline Ryanair was the top percentage gainer in Europe, soaring 11 percent after strong results, while drugmaker GlaxoSmithKline climbed 4 percent after a U.S. regulatory panel said one of its key drugs should stay on the market.

Lloyds TSB gained 3 percent after the bank announced its first dividend increase in five years and a rise in first-half earnings and the sale of its Abbey Life unit to Deutsche Bank for almost 1 billion pounds. Deutsche gained 2.7 percent.

Crude oil prices were steady about $77 per barrel and gold was slightly firmer at $665.55 per ounce.

(Additional reporting by Michael Urquhart in Singapore, Sitaraman Shankar, Toni Vorobyova, Natalie Harrison in London)