Global stocks rally ahead of Fed, bank earnings

By Mike Dolan

LONDON (Reuters) - Global stock markets stabilized on Tuesday, recouping some of the heavy losses incurred since last week's near collapse and firesale of investment bank Bear Stearns BSC.N as the Federal Reserve prepared its next move.

With the Fed widely expected to slash U.S. interest rates by up to a full point to 2 percent on Tuesday, the Dow Jones Industrial Average .DJI closed higher on Monday and Wall St stock futures pointed to a higher open on Tuesday.

European banking stocks .SX7P that had been hammered on Monday also bounced sharply, lifting the broad FTSEurofirst 300 index .FTEU3 of European shares up more than 2 percent.

Critical to market sentiment before the Fed meets will be first-quarter earnings from two of Wall St's biggest investment houses Lehman Brothers LEH.N and Goldman Sachs (GS.N), where details of further debt writedowns are expected.

"Bank results will be crucial, it will be interesting to see how much balance sheet contraction there will be with existing capital already eaten into by writedowns," said David Pais, currency strategist at Citi.

Lehman results are due at 8 a.m. EDT and Goldman at 8:30 a.m. EDT.

Lehman shares fell almost 20 percent on Monday as investors feared wider contagion from the Bear Stearns collapse and fretted about what other firms might face similar difficulties.

But plummeting U.S. interest rates, which sent three-year Treasury bill rates briefly below 1 percent to 50-year lows on Monday, continued to weigh on the dollar .DXY.