Global stocks rally as global sell-off abates, bonds fall

NEW YORK, Oct 17 (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.

Results at General Electric GE.N, Honeywell International Inc HON.N and Morgan Stanley MS.N topped expectations. With 81 companies in the S&P having reported third-quarter results, 64.2 percent beat expectations, slightly below the average over the past four quarters, but better than the 20-year average.

GE rose 3.3 percent to $25.05, Honeywell gained 3.6 percent to $89.49 and Morgan Stanley advanced 3.1 percent to $33.53.

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, a Thomson Reuters/University of Michigan preliminary reading for the month showed.

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 .MIWD00000PUS rose 1.3 percent, while the FTSEurofirst 300 .FTEU3 index of top European shares rose 2.52 percent to 1,277.14, its biggest gain by percentage since June 2012.

Though nervousness remained, some reassuring words from U.S. and European policymakers, better U.S. data and beaten-down prices after another big week of equity and commodity declines, drew buyers into the market.

The U.S. dollar edged higher. The euro EUR= was last down 0.32 percent against the dollar at $1.2766, just off a session low of $1.2755. The dollar was up 0.36 percent against the yen JPY= at 106.70 yen.

"Obviously, some of the momentum in the economy is continuing, despite what Wall Street tells you," said Axel Merk, chief investment officer at Palo Alto, California-based Merk Investments.

Brent crude oil 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 LCOc1 rose 48 cents to a high of $86.30. U.S. November CLc1 crude, heading for its third weekly decline, was up 86 cents at $83.56.

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

Benchmark 10-year notes US10YT=RR, which rose by as much as 3 points on Wednesday on fears over the global economy, were off 19/32 in price on Friday to yield 2.22 percent.

(Reporting by Marc Jones; Editing by Hugh Lawson and Chris Reese)

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