M&A optimism boosts stocks to 2-1/2 week high

LONDON (Reuters) – World stocks hit 2-1/2 week high on Monday and emerging market assets rallied as last week’s news of major company deals eased concerns that the credit crisis might be hurting corporate and economic activity.

Optimism has grown since Friday’s news that China teamed up with U.S. aluminium producer Alcoa to buy a $14 bln stake in Rio Tinto and a move by Microsoft to bid $44.6 bln for Yahoo!.

The positive news overwhelmed Friday’s disappointing U.S. data showing employers cut payrolls for the first time in 4-1/2 years in January. The data had fanned concerns that the U.S. economy, hit by the fallout in the mortgage sector, was heading into recession.

“The Microsoft news is improving market sentiment as it hasn’t seen global M&As of this magnitude for a while. The bid amount is ridiculously huge and the premium is also large,” said Soichiro Monji, chief strategist at the equity management department at Daiwa SB Investments in Tokyo.

The FTSEurofirst 300 index rose half a percent on the day while MSCI main world equity index was up 0.6%, hitting highs last seen in mid-January.

The credit crisis, which started in earnest in August, has raised the cost of credit and prompted the Federal Reserve to cut U.S. interest rates several times, including an emergency 75 basis point rate cut in January.

Emerging stocks and Asian stocks were both up more than 2%. Emerging sovereign spreads were unchanged.

The dollar steadied just above last week’s two-month low against a basket of currencies. Analysts see a further fall in the dollar as the Fed is expected to cut interest rates further to kickstart the world’s biggest economy.

Interest rate futures are now pricing in a 64% chance that the Fed would cut rates again in March, by 50 bps.

“The rise in claims and decline in payrolls point to further easing from a Fed which remains focused on growth … We anticipate a realisation of lower rates in the near-term will continue to weigh on the dollar,” JP Morgan said in a note.

The Australian dollar hit a three-month high against the U.S. currency before Australia‘s expected increase in benchmark interest rates to an 11-year peak of 7.0% this week.

The March Bund future was down 27 ticks.

U.S. light crude was up 0.4% at $89.31 a barrel, encouraged by rising stocks. Gold ticked up to $910.20 an ounce, off Friday’s record highs, while platinum jumped to all-time highs of $1,786.50 an ounce.