Global stocks rally after another tumultuous week

It was another topsy-turvy week for world markets, as global investor sentiment deteriorated following a bailout of a Spanish saving bank and rising geopolitical tension in the Korean peninsula. Stocks across the world plunged anew after Spain's central bank was forced to takeover ailing Church-controlled savings bank CajaSur. The seizure came as authorities grapple with a sector reeling from the collapse of the housing market at the same time that the government is hard-pressed to fix its own finances. The IMF warned that the Spanish banking sector needs to speed up restructuring to create more robust institutions. Separately, Four Spanish banks submitted a plan to combine their businesses in a move that would create the country's fifth largest lender, raising fears that the euro-zone debt crisis was worsening.

Risk aversion escalated after North Korea warned that it may take military action to defend its western sea border. North Korean leader Kim Jong-il ordered his military to be on a combat footing, Yonhap news agency said. The report came after a multinational investigation concluded that a North Korean submarine torpedoed a South Korean warship in March. South Korea’s won fell the most in more than a year to touch a 10-month low but the currency pared losses on speculation that financial regulators intervened after the finance ministry said it was watching the market.

Reports that Spain was moving closer to a general strike over spending cuts underscored difficulties that the governments in the debt-strapped euro-zone region face in implementing spending cuts and other tough austerity measures. Recent steps from Greece, Portugal and Spain are encouraging but represent only the beginning of what is set to be a tough adjustment, noted some analysts.

Separately, the UK kicked off its own fiscal-deficit-reduction efforts, detailing 6.2 billion pounds (US$8.9bn) of budget cuts. An austerity budget was also approved by Italy's cabinet on Tuesday cutting public sector hiring and pay, temporarily delaying retirement for some state workers and reducing funds to local government, according to a draft.

Reports also said that the German government was reportedly planning to ban the naked short-selling of all German stocks listed on the country’s exchanges in a sweeping extension of the contentious bar on the naked short-selling of key financial instruments.

The euro touched a four-year low against the dollar after a report in the Financial Times (FT) said that China was considering reviewing its holdings of euro-zone bonds amid growing concerns over the region's fiscal problems. However, China later dismissed the FT news as "groundless", sparking a worldwide rally across markets and asset classes. European stocks rose for a third day on Friday, extending a weekly gain for the Stoxx Europe 600 Index, after US shares had the biggest rally in almost three weeks. Asian equities also advanced. The Stoxx 600 rallied 6% over the last three days of the week after plunging to an eight-month low on May 25, bringing this week’s advance to 3.7%.

The MSCI Asia Pacific Index rallied 1.5% on Friday, a third day of gains. Oil rallied above $75 a barrel and the South Korean won strengthened. The euro rose for a second day against the dollar on Friday, strengthening 0.4% to US$1.2411. It appreciated 0.6% compared with the yen, which declined against all 16 of its most-traded counterparts. The US Dollar Index, which tracks the currency against six trading partners, slid 0.2%.