* World shares rise as U.S. votes in crucial election
* Dollar, government bonds drop as risk appetite takes over
* Oil up nearly 3% as recovery continues
* Investors bracing for volatility if outcome contested
* Graphic: 2020 asset performance http://tmsnrt.rs/2yaDPgn
* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh
By Huw Jones
LONDON, Nov 3 (Reuters) - Europe's stock markets rallied on Tuesday and Wall Street looked set to follow as investors bet on a clear win for Joe Biden as the United States votes in its most polarised presidential election in living memory.
U.S. President Donald Trump and Democratic rival Biden made a last-minute push for votes in battleground states on Monday and though their campaigns were wary of possible legal disputes that could delay a clear outcome, a wave of risk appetite swept through markets. pan-European STOXX 600 index .STOXX rose 1.6% in a second day of robust gains, having slumped to a five-month low last week as many of the region's top economies were forced back into almost complete coronavirus lockdowns. .EU
Growth-sensitive cyclical sectors such as oil and gas .SXEP , miners .SXPP and banks .SX7P once again led the rally - all rising between 2-3.5%.
"Markets are pricing for a Biden win, certainly a clear outcome, and they want a clear and uncontested outcome," said Michael Hewson, chief market analyst at CMC Markets.
A shock Trump win, a contested result, or just a divided outcome could all trigger corrections in markets, he said.
"Control of the Senate is crucial for any 'blue wave' scenario to materialise, otherwise divided government continues and fiscal stimulus expectations will need to be scaled back," added Alvin Tan, Asia forex strategist at RBC Capital Markets.
Reassuring earnings from French bank BNP Paribas BNPP.PA lifted its shares by 6.5%, adding to a sense that the banking sector was holding up relatively well to an economic pounding from the COVID-19 crisis.
But a 40% fall in full-year earnings at Associated British Foods ABF.L due to a profit plunge in its Primark clothing business was a reminder of how the pandemic is wreaking havoc with corporate balance sheets. ABF shares fell 1.7%.
No major European economic data is due on Tuesday, with only a smattering of earnings to steer investors. BNP bank was buoyed by a surge in currency and commodity trading to beat third quarter profit expectations. story on how global markets have fared over the last four years click MARKET MOOD
Analysts said that while the mood was more upbeat on Tuesday, it remained febrile as European countries introduced tougher lockdown restrictions to fight a pandemic that was set to hit the economy further.
Australian's central bank became the latest to take action to shore up the coronavirus-hit economy, trimming interest rates to near zero on Tuesday and ramping up its bond-buying plans.
Investors are also waiting on Federal Reserve and Bank of England meetings this week that are also expected to bring more support.
"The problem with markets is that they are very binary. One day everything is hunky dory and the next day it's the depths of despair and so you have to tread that tightrope between the two that creates volatility," CMC Markets' Hewson said.
The global tone had also helped by gains on a Wall Street on Monday underpinned by U.S. manufacturing activity accelerating more than expected in October.
Wall Street futures were up 1% ahead of the start of New York trading. .N MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS had added 1.4% overnight. The gauge is less than 1% shy of a 2-1/2 year high struck in mid-October and up over 5% this year, driven by a 37% rebound from China's markets since March.
Currency markets also seemed to be tilting towards a victory for Biden. The dollar was down almost 0.5% against a basket of the world's other top currencies =USD at 93.656 after hitting a month-high on Monday. /FRX
Analysts believe a Biden win would weaken the dollar as the former vice-president is expected to spend big on stimulus and to take a freer approach to trade, boosting other currencies at the dollar's expense and potentially pushing up bond yields.
The euro EUR= extended gains through the morning to stand 0.5% higher at $1.1645. Sterling GBP= went up 0.6% to just below $1.30, while Russia's rouble RUB= , which has been one of the currencies hit hardest by the prospects of a Biden win, also saw a strong bounce. .RU
Strategists at Blackrock (NYSE:BLK) Investment Institute said polls were suggesting a greater likelihood of a Democratic sweep in the election.
"We are starting to incorporate themes we believe would outperform in that event, moving toward a more pro-risk stance overall despite last week's market pullback," the strategists said in a report.
South Korea's main index .KSII advanced 1.7% and Hong Kong's index .HSI sprinted 2.2% higher. The MSCI China index hit a 23-year high too as Chinese factory activity also expanded the fastest in a decade. safe-harbour yen JPY= was steady at 104.76 yen per dollar. FRX/ Japanese markets were closed for a holiday.
The Aussie dollar AUD=D3 fell as much as 0.2% and Australia's ASX 200 .AXJO ended 2% higher as the central bank trimmed interest rates to near zero and expanded its bond-buying programme, as expected. prices were clawing higher after two weeks of weakness, with Brent futures LCOc1 up nearly 3% at $40 a barrel again and U.S. WTI up 3.2% at $38. O/R
Gold XAU= ticked up 0.2% to $1,894 an ounce, while benchmark U.S. and European bond market yields, which are a proxy for governments' borrowing costs, were also shuffling higher.
"There is an expectation that there will be a Biden victory," said Jan von Gerich, an analyst at Nordea. But he said that there was a "preparedness that there could be some big moves" on Wednesday should the result be unclear.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World stocks market cap rise over last four years
https://tmsnrt.rs/2TL19hh Major world stock indexes over the last four years
https://tmsnrt.rs/326YYsP Key emerging currencies being split by U.S. election
https://tmsnrt.rs/326Toa7
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