Stocks up on U.S. data, oil; euro slips pre-summit

NEW YORK (Reuters) - Stocks rose on major world markets on Wednesday after encouraging U.S. data and a rally in crude oil prices, but the euro slipped ahead of a European summit seen as unlikely to produce a credible solution to the region's debt crisis.

Wall Street stocks logged their largest gain in a week, with the S&P 500 index rising nearly 1.0 percent. The rally came after data showed demand for long-lasting U.S. manufactured goods rose sharply more than expected in May and U.S. pending home sales hit a two-year high.

On commodity markets, U.S. crude oil prices recovered to above $80 (51.3 pounds) per barrel and Brent crude in London erased early losses as a strike by Norwegian oil workers dragged on.

The rally in oil helped accelerate gains in U.S. stocks, with shares of energy firms among the biggest gainers.

While investors welcomed the rebound, few had illusions about the market's long-term trend as the euro zone crisis rumbled on without a solution.

"Sentiment is pretty negative - when you get people this depressed markets have a tendency to bounce and that is pretty much where we are at right now," said Doug Foreman, director of equities at Kayne Anderson Rudnick Investment Management, an affiliated manager of Virtus Investment Partners in Los Angeles, California.

European Union leaders remained unusually divided ahead of the two-day summit beginning Thursday over how to stem the bloc's spreading debt crisis, now in its third year.

EUROPEAN LEADERS AT ODDS

Bridgewater Associates, the world's largest hedge fund with $120 billion in assets, doubts Germany will back off its tough austerity stand at the upcoming EU summit in Brussels.

"For this reason, we think the popular assumption that the Germans and the ECB (which requires agreement of the key factions within it) will come through with the money to make all these debts good should not be taken for granted," the fund said in its daily market note. "This 'fat tail' event must be considered a significant possibility."

Indeed, on the eve of the EU summit German Chancellor Angela Merkel brushed aside increasingly shrill calls from Spain and Italy for emergency action to lower their soaring borrowing costs.

"I fear that at the summit we will talk too much about all these ideas for joint liability and too little about improved controls and structural measures," she said, renewing her mantra that Germany, Europe's strongest economy, should not be overburdened.

At the close, the Dow Jones industrial average was up 92.34 points, or 0.74 percent, at 12,627.01. The Standard & Poor's 500 Index was up 11.86 points, or 0.90 percent, at 1,331.85. The Nasdaq Composite Index was up 21.26 points, or 0.74 percent, at 2,875.32.

European shares also rallied on the upbeat U.S. data, closing up 1.4 percent for their largest gain since June 19.

The MSCI world equity index rose 0.9 percent, though it remained down week-to-date.

The euro edged lower, slipping against the U.S. dollar for a third straight day as it traded 0.2 percent down at $1.2467.

Growing concerns that more peripheral euro zone nations will be shut out from capital markets and expectations that fiscal austerity will drag the region into a more painful recession will see the euro stay under pressure. Any bounce toward the $1.27 or $1.28 level would attract sellers, traders said.

"I am going short euro/dollar into the summit," said Stuart Frost, head of absolute returns and currency at RWC Capital, a London-based fund manager. "The euro should be a lot lower than what it is and even if there is an agreement, chances of which are very low, the currency is headed towards $1.20."

EURO BONDS

Debt markets continued to reflect the worsening funding outlook for many euro zone nations, with investors reluctant to increase their exposure even to safe-haven debt ahead of the leaders' summit.

Italy's six-month borrowing costs rose to 2.957 percent at auction on Wednesday, their highest since December. The spike comes just ahead of a five- and 10-year debt sale for up to 5.5 billion euros on Thursday. On Tuesday, Spain saw its short-term borrowing costs nearly triple.

The benchmark 10-year U.S. Treasury note was up 2/32, its yield at 1.6211 percent.

Markets had been hoping this week's summit would deliver at least a high-level agreement on greater fiscal and financial integration across the euro area that could then ultimately lead to the issuance of common euro bonds.

"It is slightly different than what we saw before other summits in the past when hopes were quite high," said Norbert Wuthe, senior government bond strategist at Bayerische Landesbank. "Now we are disappointed going into the summit and there is a positive surprise potential."

(Additional reporting by Angela Moon, Rodrigo Campos, Ryan Vlastelica, Nick Olivari and Wanfeng Zhou in New York, and Richard Hubbard and Marius Zahariain London; Editing by Andrew Hay and Chizu Nomiyama)

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