Equities extend rally; oil rebounds, helping rouble rise

NEW YORK (Reuters) - Equity markets worldwide extended the week's rally on Friday and oil prices rebounded from recent lows, even though market volumes were beginning to thin as investors started to reduce exposure as the end of year approaches, traders said.

Wall Street posted modest gains after the S&P 500's best two-day rally in three years brought the index within 1 percent of its all-time high, after the U.S. Federal Reserve's last policy statement of the year buoyed investor sentiment.

Markets overall were ending 2014's final full week of trade on a high. Wall Street's momentum, hopes that Russia was stabilizing and a recommitment from Japan to its massive stimulus campaign pushed Asian stocks to their best day in 15 months.

"We have digested the drop in oil, we have gotten past the Fed, and now we will see what we will do for the rest of the year," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.

Brent oil prices rose back above $60 a barrel, recovering from near a 5-1/2-year low, as investors squared books ahead of the year-end after a six-month slide. [O/R]

The rise in oil, which along with gas is among Russia's chief source of export revenue, helped the hard-hit rouble claw back another 5 percent of the roughly 58 percent it lost between the end of June and Monday.

"I think Russia still bears watching over Christmas because oil has not bottomed out. A dip in Brent prices below $60 means that financial stability and economic stability is still at risk," said Phyllis Papadavid, currency strategist with BNP Paribas in London.

The rouble this week slumped as much as about 20 percent against the dollar despite a massive hike in Russian interest rates, putting at risk the stability on which President Vladimir Putin has built his popularity.

In Europe, worries emerged that the European Central Bank's money-printing plans could come with a number of restrictive strings attached.

Officials speaking to Reuters on condition of anonymity said the ECB may require countries such as Greece or Portugal to set aside extra money or provisions to cover potential losses from any bond-buying it embarks on next year.

The euro zone blue-chip EuroSTOXX 50 <.STOXX50E> and the Swiss SMI <.SSMI> both ended down 0.4 percent as all major continental indexes fell.

The FTSEurofirst 300 index of top European shares <.FTEU3>, was boosted by a 1.2 percent surge in stocks on Britain's FTSE 100 <.FTSE>, ended 0.4 percent higher at 1,361.07.

Wall Street was expecting some volatility during "quadruple witching," the expiration of stock options, index options, index futures and single-stock futures.

The Dow Jones industrial average <.DJI> fell 9.11 points, or 0.05 percent, at 17,769.04, the S&P 500 <.SPX> gained 3.31 points, or 0.16 percent, at 2,064.54 and the Nasdaq Composite <.IXIC> rose 8.90 points, or 0.19 percent, at 4,757.29.

Markets spent two days celebrating the U.S. Federal Reserve's pledge to be patient in raising rates. The S&P 500 marked its biggest daily gain since January 2013 and gained 4.5 percent in two sessions.

In the currency markets, the euro fell to a 28-month low against the dollar, driven by the prospect of ECB bond buying. The yen was also weaker against the dollar, at 119.58, dented by Japan's ongoing monetary stimulus measures. [FRX/]

Yields on U.S. 10-year bonds fell slightly to 2.18 percent in U.S. trading. The yield on the 10-year this week fell at one point to 2 percent.

(Additional reporting by Marc Jones, Marius Zaharia and Jamie McGeever in London; Chuck Mikolajczak in New York; Editing by Dan Grebler and Leslie Adler)

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