March 3, 2020 / 12:50 PM / a month ago

GLOBAL MARKETS-Stocks lead rally as G7 pledges virus support

* Hopes of government and central bank support lift global shares

* ECB says it is ready to take targeted measures

* G7 says it will use all available tools

* Australia central bank cuts policy interest rate

* Oil prices recover by 2%

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

By Marc Jones

LONDON, March 3 (Reuters) - A sharp rebound in world stock markets lost only a little steam on Tuesday despite a lack of any immediately gratifying measures after global policymakers pledged to address the economic fallout from the coronavirus outbreak.

Europe's main bourses were still more than 2% higher but it was no longer the 3% that had them heading for their strongest day since 2016 and investors shuffling out of safer, lower-yielding assets.

Wall Street's main S&P 500 and Dow Jones markets were flat in early trade, having jumped by 4% and 5% respectively on Monday for their biggest daily gains since 2009.

Finance ministers from the G7 and central bank governors said in a statement that they would use "all appropriate policy tools" to safeguard against the economic risks posed by the fast-spreading coronavirus.

"We reaffirmed our commitment to adopt all appropriate policy steps," Japanese Finance Minister Taro Aso told reporters after a G7 conference call. "And that we stand ready to cooperate further on timely and effective measures."

The mild sell-off in super-safe government bonds came after yields on benchmark U.S. Treasuries hit record lows in recent days as worries mounted about a potential global recession.

The decision to hold a G7 call came after the head of the European Central Bank, Christine Lagarde, on Monday joined the chorus of heavyweight central bank chiefs signalling a readiness to deal with the threat from the outbreak.

Earlier messages from the U.S. Federal Reserve that it was prepared to act continued to weigh on the dollar, having fuelled expectations of a sizable rate cut at its meeting in two weeks.

The dollar, meanwhile, lost 0.4% against the yen, weakening to 107.9 yen and slipping towards the five-month low of 107 set on Monday.

Lagarde's comments weakened the euro a touch at $1.1115 , having hit an eight-week peak of $1.1185 in the previous session. Until that point other top ECB policymakers had said the bank was still assessing the situation.

The Australian dollar, viewed as a proxy bet on China because of the raw materials it sells there, sat above a recent 11-year trough, largely on short covering after its central bank cut interest rates earlier in the day.

Oil prices gained a further 2% after a jump of more than 4% on Monday. U.S. West Texas Intermediate crude futures went to $48 a barrel while Brent crude stood at $52.90.

MSCI's world stocks index was up 0.5% having scored its best day since 2011 on Monday when Wall Street's roar higher pushed it up by a little more than 3%..

"Barring any further deterioration of the coronavirus outbreak, we believe that the global cyclical recovery is likely to gain further momentum," Schroders' Asian multi-asset team said in a report as markets there posted a second straight session of rises.

MONEY MARKETS

Japan's Nikkei had closed 1.2% down, however, after short-covering ran its course and the yen firmed on the dollar, though South Korea's Kospi rose 0.6%.

Australian shares ended 0.7% up after the central bank cut interest rates to a record low of 0.5% - the fourth drop in less than a year.

"It is reasonable to expect a response that reflects a combination of fiscal measures and central bank initiatives," Bank of England Governor Mark Carney said on Tuesday.

Money markets are fully pricing in a cut of at least 0.25 percentage points to the current 1.5-1.75% target rate at the Fed's March 17-18 meeting, as well as a 0.1 percentage point cut to the ECB's minus 0.5% key rate at its March 12 meeting.

The frantic moves by policymakers reflected growing fears about the disruption to supply chains, factory output and global travel caused by the new epidemic just as the world economy was trying to recover from the effects of the U.S.-China trade war.

The coronavirus, which has already claimed more than 3,000 lives, now appears to be spreading much more rapidly outside China than within the country. That leads the world into uncharted territory, though the World Health Organization has so far stopped short of calling it a pandemic.

U.S. bond yields rolled back some of their sharp falls.

The 10-year U.S. Treasuries yield moved to 1.14% from a record low of 1.03% on Monday. The two-year notes' yield jumped back to 0.87% from a 3 1/2-year low of 0.71%, though yields on the most rate-sensitive short-term notes continued to drop.

April Fed funds rate futures still price in about an 80% chance of a 0.5 percentage point cut this month and total cuts of almost a full percentage point by the end of year.

There was also the so-called Super Tuesday factor in play.

Fourteen states and one U.S. territory are hosting primary elections in a flurry that could bring more clarity over which Democratic presidential contender voters would prefer to challenge Republican President Donald Trump in November.

Additional reporting by Karin Strohecker in London and Hideyuki Sano in Tokyo; Editing by Catherine Evans and David Goodman

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