Easing Russia tensions spur Wall Street rally; bonds also gain

By Chuck Mikolajczak

NEW YORK (Reuters) - Wall Street rallied on Friday after Russia said it ended military drills near Ukraine, soothing investor nerves over regional tensions, but bond yields fell in key markets worldwide after U.S. President Barack Obama authorized air strikes in Iraq.

U.S. equities extended gains in late trading, with major indexes hitting session highs. Russia's Defense Ministry said it had finished military exercises in southern Russia, which the United States had criticized.

"The active saber-rattling is probably over but the threat is still there and yet we’ve chosen to overlook this," said Kim Forrest, senior equity research analyst, Fort Pitt Capital Group in Pittsburgh.

"The equity people definitely see the glass half full and the bond people see it half empty, and that is what we are seeing today is that fundamental split between the basic natures of the traders."

The Dow Jones industrial average (.DJI) rose 185.66 points or 1.13 percent, to 16,553.93, the S&P 500 (.SPX) gained 22.02 points or 1.15 percent, to 1,931.59 and the Nasdaq Composite (.IXIC) added 35.9 points or 0.83 percent, to 4,370.9.

The rally marked the best one day-performance for the Dow and S&P 500 since March 4 and spurred the major index to modest gains for the week, with the Dow and Nasdaq notching a 0.4 percent weekly gain and the S&P up 0.3 percent.

The benchmark 10-year U.S. Treasury note was up 3/32, the yield at 2.424 percent. Air strikes in Iraq earlier drove U.S. yields to their lowest since June 2013 before price gains eased after the Russian statement and Germany's 10-year Bund fell to another record low, closing in on 1 percent.

Obama said in an address he authorized "targeted" strikes to protect the besieged Yazidi minority and U.S. personnel in Iraq. Hours later, U.S. aircraft bombed Islamic State artillery attacking Kurdish forces near Arbil, Iraq.

Equity markets rebounded from earlier losses, with the MSCI All World Index up 0.2 percent.

A broad index of European stocks (.FTEU3) ended down 0.7 percent and Germany's DAX Index (.GDAXI) lost 0.3 percent, but was off the day's worst levels.

The intensifying risks in one of the world's biggest oil-producers jolted oil markets, at one point sending U.S. crude (CLc1) up more than $1 to $98.45 a barrel and Brent (LCOc1) to $106.39.

But oil prices trimmed gains. U.S. crude settled up 31 cents to $97.65, while Brent turned lower to settle down 42 cents at $105.02 as analysts said the strikes may lower the risk of supply disruptions. [O/R]

Fighting also resumed in Gaza between Palestinian militants and Israel.

The dollar (.DXY) was off its lows but remained 0.2 percent down, having hit a two-week low of 101.49 yen (JPY=) against the safe-haven Japanese currency.

(Editing by Nick Zieminski and James Dalgleish)