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By Herbert Lash and Marc Jones
NEW YORK/LONDON (Reuters) - World equity markets rebounded on Thursday after U.S. Senate leaders moved to avert a U.S. debt default, while a global easing in energy prices tempered deepening fears of "stagflation."
European bourses rallied off 2-1/2-month lows and Wall Street jumped as steady crude oil and natural gas prices offered relief after a shock 4% drop in German industrial production highlighted supply chain disruptions.
German output of cars and auto parts slid 17.5% in August due to supply shortages of intermediate products, providing a telling sign of the constraints posed by the combination of rising inflation and moribund growth, or stagflation.
But the number of Americans filing new claims for jobless benefits fell the most in three months last week, suggesting the U.S. labor market recovery was regaining momentum after a recent slowdown as COVID-19 infections subside.
Stagflation fears are overdone, and investors are overly focused on weaker economic growth and higher inflation though the long-term market trend is higher, said Bill Sterling, global strategist at GW&K Investment Management.
"The journey ultimately is to a global expansion that continues intact, which recently has had this stagflation tinge to it," he said.
The U.S. Senate took a step toward passing a $480 billion increase in Treasury Department borrowing authority, a move that would avert a catastrophic debt default later this month but set up another partisan showdown in early December.
MSCI's all-country world index closed up 1.15%, while the broad STOXX Europe 600 index rose 1.6%.
On Wall Street, the Dow Jones Industrial Average gained 0.98%, the S&P 500 rose 0.83% and the Nasdaq Composite moved up 1.05%.
Some of the negative pressures have been mitigated as investors reduced positions on concerns about a "what if" scenario concerning the debt ceiling, said Michael James, managing director of equity trading at Wedbush Securities.
"There's still a number of black clouds hanging over the market, but the skies have cleared up a little bit in the last two days," James said.
Euro zone bond yields fell as energy prices declined, recovering from a sharp sell-off in debt markets a day earlier that had been driven by inflationary concerns.
Yields on the benchmark German 10-year bund slid 0.3 basis point to -0.187%.
U.S. Treasury yields rose as traders awaited U.S. employment data for September on Friday. Volatility at the shortest end of the curve eased in the wake of a potential plan to avoid a default on government debt this month.