Stocks rally as euro gains on likely rate hikes



* Major U.S. and European indices gain more than 1%

* German IFO business index shows unexpected resilience

* ECB says it could see interest rate "lift-off" in July

* Dollar weakens as euro gains on ECB rate talk

By Herbert Lash and Marc Jones

NEW YORK/LONDON, May 23 (Reuters) - U.S. and European stocks rallied on Monday, with the S&P 500 staying clear of a bear market, while the euro leapt after the European Central Bank said it was likely to lift its deposit rate out of negative territory by September.

Oil prices slid and gold extended recent gains, but the dollar fell further as investors cut their bets on more advances in the greenback based on market expectations of yields moving higher still from Federal Reserve monetary tightening.

The MSCI all-country world index .MIWD00000PUS gained 1.47% but is still down about 17% from its record high in January. The pan-European STOXX 600 index .STOXX closed up 1.26%, with the major British .FTSE , French .FCHI , German .GDAXI and Spanish .IBEX indices rising more than 1%.

Stocks on Wall Street also gained more than 1%, though the Nasdaq lagged after briefly trading in the red.

The Dow Jones Industrial Average .DJI rose 1.92%, the S&P 500 .SPX advanced 1.68% and the Nasdaq Composite .IXIC added 1.3% in choppy trade.

Value stocks .IVX rose 1.73% and growth stocks gained 1.63%. The rally lifted all 11 S&P 500 sectors and put the benchmark on track for its first week of gains after seven consecutive weekly losses on fears of a looming slowdown, yet many analysts say the downturn in equities is not over.

Stock investors are under the illusion that the Fed will rescue the market from further decline by easing monetary policy, or what has become known as the Fed "put," said Steven Ricchiuto, U.S. chief economist at Mizuho Securities.

"It's going to be a very, very sluggish growth environment and the Fed's not going stand in the way of it," Ricchiuto added. "You're seeing the bond market go down in yield. That's been saying to the equity market that the put isn't there and therefore the equity market needs to adjust as well."

The yield on 10-year Treasury notes US10YT=RR was up 7 basis points at 2.857% after declining almost 40 basis points from a multi-year high of 3.203% set two weeks ago.

Others also saw difficulties ahead. BlackRock Investment Institute cut its ratings of developed market equities to "neutral" from "overweight," citing the Fed's potentially overzealous efforts to curb inflation and signs of an economic slowdown in China.

The focus in Europe was on ECB President Christine Lagarde, who accelerated an already sharp policy turnaround from all but ruling out rate hikes to now penciling in several in the face of record-high euro zone inflation.

The prospect of higher rates lifted the euro up 1.24% to $1.0691. The single currency has risen about 3.3% since hitting a multi-year low 10 days ago.

"The doves are throwing in the towel," said Holger Schmieding of Berenberg bank, adding that he expects ECB rate hikes of 25 basis points in July, September and December.

A survey from the Ifo Institute on Monday showed that German business morale unexpectedly rose in May, helping to calm investors for the moment.

"I don't think we have reached rock bottom yet, it's a bear market rally. The market is still pretty concerned about sticky inflation," said Michael Hewson, chief markets analyst at CMC Markets.

The World Economic Forum holds its first in-person meeting in two years in Davos, Switzerland over the coming four days, with central bankers and the International Monetary Fund participating in panels on the outlook for economies and inflation.

PEAK DOLLAR?

The dollar index =USD , which tracks the greenback against a basket of other major currencies, was down 0.855%. The index rose about 16% to a two-decade high over the 12 months to mid-May.

"The dollar may be carving out a peak, given Europe's resilience to the energy shock and potential easing of lockdowns in China," Commonwealth Bank of Australia strategist Joe Capurso said.

Asian stocks fell as investors worried inflation and rising interest rates would hamper the global economy's performance.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was slightly weaker.

Oil prices were little changed as worries over a possible recession offset an outlook for higher fuel demand with the upcoming U.S. summer driving season and Shanghai's plans to reopen after a two-month coronavirus lockdown.

U.S. crude futures CLc1 settled up 1 cent at $110.29 a barrel and Brent LCOc1 rose 87 cents to settle at $113.42.

Gold prices climbed as weakness in the dollar and economic growth concerns lifted the metal, though non-yielding bullion pared some gains after Treasury yields rose.

U.S. gold futures GCv1 settled up 0.3% at $1,847.80 an ounce, while spot gold XAU= added 0.6% to $1,856.56 an ounce.



World FX rates YTD Link
Global asset performance Link
Asian stock markets Link
S&P 500 bear markets Link



Reporting by Herbert Lash, additional reporting by Huw Jones
in London; Editing by Emelia Sithole-Matarise, Kirsten Donovan
and Will Dunham



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