GLOBAL MARKETS-Fed's slipstream leaves stocks beaming, dollar subdued

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
* Stocks gain for 3rd straight day on Fed cheer
* Dollar hovers near 7-week lows
* Italy bonds, bank stocks fall as EU says Italy broke debt
rules
* S&P 500 futures up 0.7%

By Ritvik Carvalho
LONDON, June 5 (Reuters) - Global stocks gained for a third
straight day on Wednesday, bolstered by investors' growing hopes
that the Federal Reserve might cut interest rates this year to
boost a slowing global economy, while the dollar languished near
seven-week lows.
A flare-up in trade tensions between the United States and
China, which busted investors' assumption a deal was on the
cards, has hit world stocks and triggered fears of an impending
recession.
But recent comments from policymakers have helped stem the
tide as top Federal Reserve officials this week began warning
that the trade war may force them to respond, prompting
investors to price possible interest rate cuts.
Interest rate futures show the U.S. central bank will start
cutting rates as soon as next month, with as many as three rate
cuts priced by year-end.
Fed Chairman Jerome Powell did not question the market
rethink of the U.S. interest rate trajectory on Tuesday.
He dropped his standard reference to the Fed being "patient"
in approaching any rate decision and said the central bank was
watching fallout from the trade war and would react "as
appropriate". The Fed chairman's comments come a day after St. Louis
Federal Reserve President James Bullard said in a speech that a
rate cut may be needed "soon". Stock markets responded positively to Powell's comments,
with U.S. stocks registering their biggest one-day gains in five
months.
"The last 24 hours has seen a marked change in sentiment and
although it's hard to completely attribute the move to Powell's
comments at the Fed conference yesterday, the fact that the
Chair seemingly didn't push back on very dovish market pricing
did at least fill investors with a bit more confidence," said
Jim Reid, strategist at Deutsche Bank.
The optimism rolled over into markets on Wednesday, with the
MSCI All-Country World Index up 0.4% by midday in London, adding
further to a 1.4% gain on Tuesday. The index is up 1.8% percent
on the week so far and on track for its best weekly performance
since early April. .MIWD00000PUS
S&P 500 futures were up 0.7%, indicating a buoyant open on
Wall Street. ESc1
Jasper Lawler, head of research at London Capital Group,
warned that the support markets were drawing from central banks
could be short-lived.
"Let's not forget the other half of the equation is the
escalating trade war on multiple fronts. Today the markets are
happy to focus on Fed support, but with the U.S. Commerce
Department promising retaliation in the event of China's rare
earth's threat, this trade war looks set to get worse before it
gets better."
China's dominance as a supplier of mineral elements known as
rare earths that are used in industry could be a vital
bargaining chip in the trade war with the Unite States.
China is willing to meet reasonable demand for rare earths
from other countries, but it would be unacceptable that
countries using Chinese rare earths to manufacture products
would turn around and suppress China, its commerce ministry said
last week. The International Monetary Fund (IMF) cut its 2019 economic
growth forecast for China to 6.2% on heightened uncertainty
around trade frictions, saying that more monetary policy easing
would be warranted if the Sino-U.S. trade war escalates.
European markets opened flat to marginally higher, but most
bourses barring Britain's FTSE 100 .FTSE registered gains of
nearly 0.5% by 1111 GMT. The pan-European STOXX 600 .STOXX
index was up 0.5%. .EU
Italian sovereign bond prices and bank stocks fell after
the European Commission concluded that Italy is in breach of EU
fiscal rules because of its growing debt, a situation that
justifies the launch of a disciplinary procedure. In bonds, Germany's 10-year bond yield reached a record low
and Italian debt held on to this week's gains as investors
ramped up their bets on a generous loan package for banks in the
euro zone as well as a U.S. rate cut. GVD/EUR
In currencies, the Fed comments weakened the dollar for a
fifth consecutive day, lifting the euro and pushing investors
into safe-haven assets including the Japanese yen. The dollar
struggled near a seven-week low. .DXY FRX/
"Given the extent of the dovish re-pricing of the Fed
outlook and the collapse in U.S. treasury yields in recent
weeks, the dollar losses appear fairly muted in this context,"
said Chris Turner, head of FX strategy at ING in London.
In commodity markets, oil prices resumed their slide,
dragged down by a surprise gain in U.S. inventories and comments
from the head of Russian state oil producer Rosneft questioning
the point of a deal with OPEC to withhold supplies. O/R
U.S. crude CLc1 retreated 0.6% to $53.16 a barrel. Brent
crude LCOc1 futures gained 0.05% to $62.00 per barrel. O/R