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Stocks get boost from fading worries over credit, US

shutdown

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Nikkei on the cusp of 50,000 as Takaichi trade charges on

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ECB official warns of dollar risks for euro zone lenders

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Trump-Xi meeting next week, traders hope for trade

resolution

(Updates prices)

By Amanda Cooper

LONDON, Oct 21 (Reuters) - Stocks edged up on Tuesday,

taking comfort from a possible easing in trade tensions between

the U.S. and China and an ebbing of nerves over credit risks in

the banking sector, which in turn nudged gold lower.

In Asia, the near-certainty of Sanae Takaichi becoming

Japan's next prime minister briefly sent Tokyo's Nikkei to a

record high and dented the yen.

U.S. President Donald Trump said he expected to reach a fair

trade deal with Chinese President Xi Jinping when the two meet

next week in South Korea, and played down the risks of a clash

over the issue of Taiwan.

The prospect of a resolution helped bolster investor

sentiment, along with a deal between Australia and the United

States for the supply of rare earth materials.

INVESTORS BUY THE DIP

Investor confidence was hit hard last week as a clutch of

bad loans at U.S. regional banks ignited concern over credit

risks that threatened to spill into the broader markets. The

prolonged U.S. government shutdown also weighed on risk assets.

But these worries have abated somewhat and prompted

investors to buy the dip ahead of earnings from several large

firms.

"The market has hurdled the wall of worry with ease, with

new capital injected into risk and fresh oxygen into the

market's lungs," said Chris Weston, head of research at

Pepperstone.

That said, European Central Bank chief economist Philip Lane

on Tuesday issued a stark warning for euro zone banks, saying

they could come under pressure in a scenario in which dollar

funding dries up.

"The combined presence of substantial USD-denominated

off-balance sheet exposures and volatile funding means that

sudden changes in these net exposures cannot be ruled out," he

said.

He cited April's extreme market turmoil, in which the dollar

and safe-haven U.S. Treasuries sold off hard, which he said made

it more difficult for euro zone banks to rely on their

dollar-denominated liquid assets.

Daiwa Capital Markets economist Chris Scicluna said Lane's

remarks spoke to the concern among investors about pockets of

risk building across the U.S. financial sector, as investors

pile into areas such as AI or credit, and what may happen if

those trends reverse.

"One of the big focuses has been on the private credit

strains recently in the regional banks. And quite clearly, if

there's a sudden pullback in or sudden problems in the U.S.

financial sector, it will have a significant impact on European

banks and others," he said.

"The tone of the speeches out of the (ECB) Governing

Council has been, on balance, becoming more cautious, more

attuned to risks and downside risks," he added.

The ECB, which meets next week, is not expected to deliver a

rate cut any time soon, compared with the Federal Reserve, which

could deliver as many as three rate cuts in the next six months,

based on market-based expectations.

INVESTORS JUMP BACK IN

The chance of a series of U.S. rate cuts, along with

comments from White House economic adviser Kevin Hassett that

the federal government shutdown is likely to end this week also

encouraged investors to dive back into equities.

A broad rally sent all three major U.S. stock indexes to a

sharply higher close overnight with chip stocks hitting a

record high.

In Europe, the STOXX 600 rose 0.1% to trade

narrowly below record highs, while U.S. stock futures

edged down 0.1%.

Analysts currently expect third-quarter S&P 500 earnings

growth, on aggregate, of 9.3% year-on-year, marking an

improvement over their 8.8% growth estimate as of October 1.

In currencies, the dollar rose 0.7% against the yen to

151.83. Takaichi is expected to be pro-stimulus and against

further hikes in interest rates, a negative for the Japanese

currency and bonds but a plus for equities. The Nikkei

hit a record peak just shy of a landmark 50,000 points.

The Bank of Japan meets next week. Traders are attaching a

20% chance to a hike, although Governor Kazuo Ueda has so far

left his options open by offering few clues on the timing of a

rate hike.

Gold prices fell 2% to $4,262 an ounce, just below Monday's

record high of $4,381.21 an ounce.