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Stocks gain on Fed rate cut optimism; oil drops

* MSCI world equity index falls for third straight day

* European shares bounce on ECB inflation revamp report

* Oil slumps as production pick-up eyed (Updates with close of U.S. markets, oil settlement prices)

By Chuck Mikolajczak

NEW YORK, July 18 (Reuters) – A gauge of global stocks advanced on Thursday, erasing declines on a late rally after comments from a U.S. Federal Reserve policymaker heightened expectations for a rate cut, while oil prices dropped on forecasts of rising output.

In a speech read as a strong argument in favor of quick and aggressive action by the Fed to cut rates this month, New York Fed President John Williams said policymakers need to add stimulus early to deal with too-low inflation when rates are near zero.

“In all the Fed speak we’ve had… it seems like the ones that are more interested in cutting are more visible,” said Thomas Martin, senior portfolio manager at Globalt Investments in Atlanta, Georgia.

“Today is an indication the market feels better if they know the central banks are going to be accommodative; that is the messaging you get from the markets.”

Expectations the Fed will cuts rates by a half a percentage point jumped to 71%, according to CME’s FedWatch tool, up from 34.3% on Wednesday.

Williams’ comments led to a turnaround in stocks on Wall Street, where shares were lower for a majority of the session in part due to disappointing results from Netflix, which plunged 10.27%.

Honeywell, up 3.12%, was a bright spot as its results topped expectations and raised its full-year outlook. However, the diversified manufacturer said it is planning “somewhat cautiously” for the second half due to volatile geopolitical and economic issues.

Earnings are now expected to show growth of 0.6% for the second quarter, according to Refinitiv data. S&P 500 companies were expected to show a decline as recently as Tuesday.

U.S. and Chinese officials were scheduled to have a phone call on trade later on Thursday, U.S. Treasury Secretary Steven Mnuchin said in an interview along the sidelines of the G7 meeting in Chantilly, France, potentially opening the door for direct talks to resume.

The Dow Jones Industrial Average rose 3.12 points, or 0.01%, to 27,222.97, the S&P 500 gained 10.69 points, or 0.36%, to 2,995.11 and the Nasdaq Composite added 22.04 points, or 0.27%, to 8,207.24.

The Euro STOXX 600 managed to close off its lows on hopes of looser monetary policy from the European Central Bank.

The pan-European STOXX 600 index lost 0.22% and MSCI’s gauge of stocks across the globe gained 0.17%.

In commodities, oil slumped more than 2% on expectations crude output would rise in the Gulf of Mexico following last week’s hurricane in the region.

U.S. crude settled down 2.61% at $55.30 per barrel and Brent was last at $61.93, down 2.72% on the day.

U.S. Treasury yields fell in the wake of Williams’ comments, reversing course after separate reports showed manufacturing in the U.S. mid-Atlantic region rebounded and the labor market remained healthy, pushing yields higher.

Despite a flurry of strengthening economic data recently, market participants consider it a certainty the Federal Reserve will cut rates by at least a quarter of a percentage point at its July 30-31 meeting.

Benchmark 10-year notes last rose 9/32 in price to yield 2.0294%, from 2.061% late on Wednesday.

In currencies, the dollar also weakened following the remarks from Williams, while the euro lost ground following a report the European Central Bank’s staff is studying a potential change to its inflation goal.

The dollar index fell 0.53%, with the euro up 0.47% to $1.1276.

(Reporting by Chuck Mikolajczak; Editing by Dan Grebler)

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