LONDON (AFP) –
World stock markets rallied on Thursday as investors focused on hopes of a global economic recovery despite deepening fears about a possible swine flu pandemic.
In late morning European trade, Frankfurt climbed 1.90 percent, London added 1.99 percent and Paris gained 1.72 percent as markets were also heartened by overnight US gains.
In Asia, Hong Kong soared 3.77 percent and Tokyo jumped 3.94 percent as investors cheered the first increase in Japanese factory output in six months.
But Japan also warned Thursday that the world's second biggest economy would shrink more than expected this year as it battles its worst recession in decades.
Wall Street had leapt on Wednesday, snapping a two-day losing streak, as investors saw tentative signs of recovery in the US economy.
"The market is a fickle thing -- its focus was firmly on the impact of the Mexican swine flu at the start of the week, pushing risk aversion higher, but now its glare has fallen back on the economic rather than global health outlook," said Calyon analyst Stuart Bennett.
Stocks had tumbled on Monday, dragged down as investors flocked to safe-haven assets, with the travel sector slammed by fears that swine flu would spread across the world.
Equities have since rallied, despite news that the World Health Organisation raised its flu alert to phase five out of six -- signalling that a pandemic was "imminent" after the deadly swine flu outbreak.
However, analysts remain cautious about the uncertain outlook for stock markets.
"The markets have been rallying nicely, but we are entering a period of uncertainty," said Chris Hossain at ODL Securities.
"Several factors could bring this run to a halt -- swine flu, the Chrysler bankruptcy situation, the release of the (US) banking stress tests on Monday -- they all have the potential to be the fly in the ointment that the markets want to avoid."
Fresh fears have emerged about the health of struggling US automaker Chrysler.
The Wall Street Journal reported that the US Treasury Department's talks with lenders to keep Chrysler out of bankruptcy had broken down.
The clock was ticking on a deadline at midnight on Thursday for a viable restructuring plan that would clinch more government funding for Chrysler.
In Tokyo on Thursday, stocks rose as investors returned from a public holiday to digest news that Japanese industrial output rose 1.6 percent in March from the previous month -- the first increase since September.
But the Bank of Japan warned Thursday that the recession-hit economy was expected to shrink 3.1 percent in this fiscal year to March, from a two percent contraction predicted in January.
In US trade on Wednesday, New York's Dow Jones Industrial Average jumped 2.11 percent to finish at 8,185.73 points after two days of losses.
Market action came after the Commerce Department's first estimate of first quarter gross domestic product (GDP) showed the world's largest economy contracted at a brutal 6.1 percent annualized rate.
While considerably worse than the 4.7 percent annual rate of decline expected by private economists, and only slightly better than the 6.3 percent drop in the prior quarter, stronger consumer spending fueled hopes that the recession that began in December 2007 could end soon.
Hours after the GDP report was released, the Federal Reserve said the US economy was still contracting but at a "somewhat slower" pace as it maintained near-zero interest rates and its array of programs to boost easy credit.