MSCI world equity index up 0.9 percent at 192.09, Hopes for interest rate cuts cushion economic gloom, Government bonds rally; oil rises from 3-1/2 year low

World stocks rebounded from a  5-1/2 year low on Friday and oil rose above $50 as expectations  of further interest rate cuts helped to cushion deepening gloom  about the broader economy.

Wall Street was set for a firmer start, one day after the  benchmark S&P 500 index fell to its lowest level since  1997 as troubles at Citigroup (C) and U.S. automakers  triggered fears about the wider economy.

However, hopes that the world’s central banks would cut  interest rates further — with talk that China might lower   borrowing costs later on Friday — helped world stocks off an  earlier 5-1/2 year low.

“The darkest hour is just before dawn,” said Justin Urquhart  Stewart, director at Seven Investment Management.

“The actions being taken are the key difference between the  1930s and now.”  MSCI world equity index was up 0.9 percent  after hitting its lowest level since April 2003.

The FTSEurofirst 300 index also rose 0.2 percent.  Emerging stocks gained 2.5 percent. U.S. stock futures  were up almost 3 percent.

U.S. crude oil gained 1.7 percent to $50.23 a barrel,  having hit a 3-1/2 year low below $49 earlier.

The December bund future fell 30 ticks, reversing  earlier gains. The two-year U.S. Treasury yield touched a fresh record low of 0.9586 percent before rising.

In Asia, the 10-year Treasury note dropped a full point in  price to yield 3.112 percent, after hitting 2.990  percent on Thursday — its lowest level since the 1950s. The  10-year yield was trading at above 4 percent only in June.

“The main risk is the recession and that we are probably  ahead of the worst year over the last century in terms of  economic growth and that this will take its toll on many  industries,” said Kornelius Purps, fixed income strategist at  UniCredit.

“We are probably only at the beginning of this poor  performance in terms of economic growth and other factors will  follow. This is quite worrisome and will keep a bid in the bond  market.”

The yen fell 1 percent to 94.62 per dollar after  hitting a three-week high beyond 94 earlier. The dollar fell 0.5 percent against a basket of major currencies.

LICENSE TO CUT?

Talk of Chinese interest rate cuts complemented a rumour  that authorities might soon announce the creation of a 300  billion yuan fund to support the stock market.

Euro zone interest rates are also expected to fall next  month, and possibly earlier. A purchasing managers index survey  showed on Friday that output of euro zone services and  manufacturing business sank much further and faster than  expected in November to record lows.

JP Morgan (JPM) also said that bigger-than-expected declines in  Canadian inflation also allow the central bank to cut interest  rates more aggressively in December by as much as half a  percentage point.

The Bank of Japan, however, kept its key policy rate  unchanged at 0.30 percent on Friday. Governor Masaaki Shirakawa  said more rate cuts could disrupt markets as they might cause  various problems in ensuring smooth fund supply in money  markets.