Stocks rally as global selloff abates, bonds fall

NEW YORK (Reuters) - World equity markets rallied, with European stocks gaining the most in more than two years, and bond prices fell on Friday as investors poured back into beaten-down markets on solid U.S. corporate earnings and rising consumer sentiment.

Wall Street followed Europe's lead, with all major stock indexes climbing more than 1 percent after earnings reports eased concerns about the impact of weak global demand on U.S. growth and businesses.

Expectations among some investors that the European Central Bank will increase stimulus also buoyed sentiment.

Results at General Electric , Honeywell International Inc and Morgan Stanley topped expectations. GE rose 2 percent, Honeywell gained 4.4 percent and Morgan Stanley advanced 2 percent.

With 81 companies in the S&P having reported third-quarter results, 64.2 percent have beat expectations, slightly below the average over the past four quarters, but better than the past 20 years.

U.S. housing starts and permits rose in September, a sign the market's modest recovery is supporting a growing economy, while U.S. consumer sentiment rose in October to the highest in more than seven years.

Despite the rally, the S&P 500 index is still on track for a fourth straight weekly decline, its longest streak in more than three years. The U.S. benchmark is down more than 7 percent from a record high in September as concerns about the global economy, a resurgent European debt crisis and the Ebola virus led to a furious downturn.

"The reaction the market has had over the past couple of weeks is a bit overdone," said David Lafferty, chief market strategist at Natixis Global Asset Management, which oversees $930 billion in assets.

"The overall trend of the market is to grind higher on earnings, but the real flashpoint for risk assets is going to be the ECB," Lafferty said, referring to whether the European Central Bank can deliver a quantitative easing program.

MSCI's all-country world index rose 1.15 percent, while the FTSEurofirst 300 index of top European shares closed up 2.76 percent at 1,280.17, its biggest gain by percentage since June 2012.

The Euro STOXX 50 index of 50 European companies rose 3.1 percent in the biggest jump in almost 18 months, shy two-hundredths of percentage point of being the biggest single-day jump since September 2012.

The Dow Jones industrial average rose 243.47 points, or 1.51 percent, to 16,360.71. The S&P 500 gained 22.95 points, or 1.23 percent, to 1,885.71 and the Nasdaq Composite added 41.11 points, or 0.97 percent, to 4,258.50.

The U.S. dollar edged higher. The euro was last down 0.33 percent against the dollar at $1.2765, just off a session low of $1.2755. The dollar was up 0.34 percent against the yen at 106.68 yen.

Brent crude rose above $86 a barrel, bouncing from near four-year lows as investors bought back into a market they said was oversold, and as fighting in Iraq increased political risk.

Brent for December rose 18 cents to $86.00. U.S. November crude settled up 5 cents at $82.75, posting its third weekly decline.

U.S. Treasuries prices posted their second straight day of declines.

Benchmark 10-year notes , up as much as 3 points on Wednesday on fears over the global economy, were off 13/32 in price on Friday to yield 2.2024 percent.

(Additional reporting by Marc Jones, editing by Hugh Lawson, Chris Reese and Nick Zieminski)