Fed cut hopes send stocks and gold higher

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The Fed, which cut benchmark U.S. interest rates by 75 basis points in emergency action last week to 3.5 percent, is widely expected to lower the cost of borrowing again on Wednesday, possibly by another 50 basis points.

Easier monetary policy helps risky assets such as stocks but lowers the premium the dollar offers, making it less attractive to hold the U.S. currency. A lower dollar in turn makes it cheaper to buy gold.

"(If) the Fed will disappoint and only cut rates by 25 basis points, such a move would be negative for risk appetite ... but at the same time (this) would provide the dollar with some support," said Michael Klawitter, currency strategist at Dresdner Kleinwort.

The FTSEurofirst 300 index rose more than 1 percent, extending its rebound from last week's two-year lows.

MSCI main world equity index was up 0.5 percent, having hit its lowest since October 2006 last week.

Emerging sovereign spreads widened 2 basis points while emerging stocks rose 0.8 percent.

The March Bund future was down 18 ticks.

Analysts say an investment strategy seeking higher risk assets when the global economy faced a slowdown is likely to prove disastrous long-term but this week's events might offer opportunities.

"Markets have not yet capitulated and risk takers seem to be just waiting to put risky positions back into place. This strategy will ultimately end in tears," BNP Paribas said in a note to clients.

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