Stocks rally but investors wary before ECB forecasts

By Jamie McGeever

LONDON (Reuters) - World stocks rose on Thursday and the dollar held steady as cautious investors awaited new growth and inflation forecasts from the European Central Bank later in the day and U.S. jobs data on Friday.

The ECB left interest rates unchanged, as forecast, but central bank chief Mario Draghi is expected to unveil revised forecasts in a news conference beginning at 1230 GMT (8.30 a.m. EDT). U.S. employment data could be a major factor in determining whether the Federal Reserve raises rates later this month.

Investors are broadly betting that global monetary policy will be kept looser for longer as central banks try to mitigate the recent market turmoil stemming from growing economic worries over China.

"We expect that President Draghi will echo the IMF's call for more collective action to raise global demand and mitigate financial risks, while holding out the option of more QE to contain the risks of euro strength and market volatility on longer-term inflation expectations," said Lena Komileva, chief economist and director at G+ Economics in London. 

The FTSEuroFirst leading index of 300 shares was up 1.3 percent at 1,414 points. Germany's DAX was up 1.6 percent, France's CAC 40 was up 1.2 percent and Britain's FTSE 100 was up 1.4 percent.

U.S. futures pointed to a rise of around 0.5 percent on Wall Street, adding to Wednesday's near 2 percent rise. Despite that rebound, however, shares have only recovered less than half of the losses chalked up over the past two weeks.

Japan's Nikkei rose for the first time in four days, gaining 0.7 percent, but weakness in Australia and falls in Asian currencies drove the MSCI's broadest index of Asia-Pacific shares outside Japan down 0.2 percent.

China's stock markets, the root of much of the global volatility in recent weeks, were closed on Thursday.

IMF WEIGHS IN

While global share prices are getting some respite, any relief rallies may be brief. With uncertainty over policy in the United States and China, investors expect trade to remain extremely choppy.

Draghi is expected to lower the ECB's growth and inflation outlook because of falling oil prices and China's economic slowdown, and may pledge to beef up the bank's bond-buying program if prospects weaken further.

The euro was unchanged at $1.1230, and the dollar was down 0.2 percent at 120.17 yen.

The 10-year German Bund yield was down 2.5 basis points at 0.77 percent, while the comparable 10-year U.S. yield was down 2.1 bps at 2.17 percent.

Emerging markets were under more pressure.

The real tumbled to its weakest level since 2002 on Wednesday as expectations of a growing fiscal deficit fed fears that Brazil would lose its investment-grade credit rating.

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The International Monetary Fund entered the global growth and inflation debate late on Wednesday, warning of growing downside risks to the world economy and urging central banks to keep policy accommodative and supportive.

As Friday's U.S. August employment report and the Fed rate decision loom, the question for investors is whether the China-inspired risk sell-off in recent weeks is a big enough shock to justify a delay in the Fed raising rates.

"The IMF clearly doesn't think raising rates against the modest global growth backdrop is a good idea," said Societe General analysts in a note on Thursday.

Oil prices remained volatile after their 25 percent surge late last month.