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GLOBAL MARKETS-Wall Street rallies on GDP data; euro firm after EU downgrade

Richard Leong
Friday, 20 Dec 2013 | 4:30 PM ET

* S&P, Dow hit record highs, Nasdaq highest since 2000

* Euro rebounds in wake of S&P's cut of EU's AAA rating

* U.S. yield spreads shrink as Fed's taper changes rate view

* Gold rises but set for biggest annual loss in 32 years

NEW YORK, Dec 20 (Reuters) - U.S. stocks jumped on Friday after the U.S. government said the economy grew at its briskest pace in nearly two years, while the euro held steady, paring early losses after Standard & Poor's stripped the European Union of its triple-A credit rating.

Gold rebounded from a six-month low, but was on track for its biggest annual loss in more than three decades, as investors dumped the precious metal after the U.S. Federal Reserve decided to reduce its bond purchases.

The Fed's decision on Wednesday to begin tapering its $85-billion monthly bond purchases in January has hurt medium-dated U.S. government debt but supported longer-dated U.S. government debt.

Since then, the yield gap between medium- and long-dated Treasuries contracted to its tightest level in more than three months, signaling that some traders reckon the Fed might raise interest rate sooner than they had expected and the tapering would reduce the risk of a long-term inflation surge when U.S. growth accelerates.

The Commerce Department reported that the U.S. economy grew at a 4.1 percent annual rate in the third quarter, a sharp upward revision from the prior growth estimate of 3.6 percent. The data made investors more optimistic about the prospects for corporate profit growth and about owning stocks and other risky assets for 2014.

"The global economy is showing signs of improvement. We are seeing that in the U.S. with the GDP data today," said Terry Sandven, chief investment strategist at U.S. Bank Wealth Management in Minneapolis, which oversees $113 billion.

The S&P 500 index and the Dow Jones Industrial average posted record highs, while the Nasdaq composite advanced to its highest since 2000. The FTSEurofirst 300 index of top European shares booked its biggest rise in eight months.

Investors appeared more comfortable with the Fed's modest cut in stimulus as the U.S. central bank had signaled interest rates were likely to stay low for longer.

"Despite the cut, the Fed is still injecting $75 billion a month in liquidity, which will continue to support equities going forward," said David Thebault, head of quantitative sales trading at Global Equities in Paris.

MSCI's all-country world equity index rose 0.4 percent to 400.40, 3 points below its year high.

On Wall Street, the Dow Jones industrial average ended up 42.06 points, or 0.26 percent, at 16,221.14. The Standard & Poor's 500 Index closed up 8.71 points, or 0.48 percent, at 1,818.31. The Nasdaq Composite Index finished up 46.61 points, or 1.15 percent, at 4,104.74.

Europe's broad FTSEurofirst 300 index closed 0.45 percent higher at 1,287.61, bringing its weekly gain to 3.6 percent, its biggest since late April.

Earlier, Toyko's Nikkei index closed up 0.07 percent, bringing its weekly gain to 3.03 percent.

In contrast to the run-up in stocks, most commodity prices melted down following the Fed's tapering decision, though they showed signs of stabilizing.

Gold rebounded after hitting a six-month low. It was still on course for its largest annual loss in 32 years. Gold was last up 1 percent at $1,201.54 an ounce, shaving its weekly decline to 2.93 percent but still on track to lose 28 percent on the year.

The oil market has held up against the broader pessimism on commodities.

Brent crude oil rose $1.48 or 1.5 percent to settle at $111.77 a barrel for a 2.7 percent gain on the week, boosted by a positive outlook for fuel demand in the United States and reduced Libyan supply. U.S. oil futures settled up 28 cents or 0.28 percent at $99.32, which was up 2.6 percent on the week.

In the currency market, the euro was up 0.1 percent against the dollar at $1.3671 after hitting an early low of $1.3626. The single currency fell 0.5 percent versus the greenback on the week.

Standard & Poor's on Friday cut its supranational long-term rating on the European Union to AA-plus from AAA, citing rising tensions on budget negotiations and following cuts to the ratings of member states in recent months.

Rival rating agency Fitch later affirmed France's AA-plus rating.

The dollar weakened against the Japanese yen on lower U.S. bond yields. It was last down 0.2 percent at 104.03 yen after touching a five-year high against the Japanese currency earlier on the upbeat U.S. growth data.

The yield on the benchmark 10-year Treasuries note fell 4 basis points to 2.89 percent after flirting with its year high of 3 percent earlier.

The spread between five-year and 30-year Treasuries, which some analysts see as a gauge of investors' view on changes in the Fed's interest rate policy and its bond purchase program, shrank to 2.15 percent, its tightest level since mid-September.