Stocks in Europe recouped some recent losses on Wednesday on hopes that European policymakers were thrashing out a plan to shore up the banking sector, which has been damaged by fears of a Greek debt default.
News that the International Monetary Fund is pushing for radical changes in the way the region's debt crisis should be handled and a solid batch of U.S. economic data helped improve the market tone.
The rally, which was particularly evident in Europe following a late surge on Wall Street on Tuesday, follows a dismal start to the week, when sentiment around the world was rocked by mounting evidence of procrastination and confusion in Europe's debt crisis dealings.
Those fears were quelled somewhat by an interview European Commissioner Olli Rehn gave to the Financial times, where he hinted at a possible bank recapitalization plan. The comments, when first published Tuesday, prompted the late rally on Wall Street.
The baton was carried on by European markets despite a disappointing session in Asia, a three-notch downgrade of Italy's sovereign debt to A2 by the Moody's credit rating agency, and another day of widespread strikes in Greece, the epicenter of Europe's debt woes.
"The jump in risk appetite was driven by media reports that EU officials are examining plans for coordinated recapitalization of European banks," said Adam Cole, an analyst at RBC Capital Markets.
Germany's DAX was 4.5 percent higher at 5,461 while the CAC-40 in France rose 3.4 percent to 2,948. The FTSE 100 index of leading British shares was 2.8 percent higher at 5,084.
The euro was also shored up by reports of a recapitalization plan, trading 0.2 percent higher at $1.3344.
Wall Street kept hold of Tuesday's gains, with the Dow Jones industrial average flat at 10,810 and the broader Standard & Poor's 500 index more or less unchanged at 1,124.
Sentiment in the U.S. was supported by a survey from the ADP payrolls firm showing more private sector jobs were created in September than anticipated. Analysts said that may augur well for Friday's official government data, which often set the stock market tone for a week or two after their release.
A stronger than anticipated non-manufacturing survey from the Institute for Supply Management also helped. Its main index may have fallen to 53 in September from the previous month's 53.3 but the decrease was less than the anticipated decline to 52.8. Anything above 50 indicates expansion.
Investors around the world will be careful not to get too carried away about an imminent solution to Europe's debt stress. After all, sentiment has fluctuated wildly between despair and hope over the 21 months or so that Europe has been mired in its debt crisis.
"Every time this suggestion was made, critical comment came forth from European politicians, telling us that banks were adequately capitalized," said Louise Cooper, markets analyst at BGC Partners. "All this does is teach us not to believe what we are told by the political class."
For now though, investors are giving EU policymakers the benefit of the doubt, especially as the International Monetary Fund has also backed calls for more money to be put into the banks.
Meanwhile, a comment by Antonio Borges, the head of the IMF's Europe program, on Wednesday led to confusion about the IMF's options in the crisis.
Borges said in Brussels that the eurozone's bailout fund should get more firepower and new tools. To help, he said the IMF could intervene in bond markets to keep the crisis from engulfing large economies such as Italy and Spain. The surprise proposal would have profoundly altered the fund's role, but Borges later retracted his comment.
"The fund can only lend its resources to countries, and cannot use these resources to intervene in bond markets directly," he said in a statement. "Any alternative lending modalities to what we do now would require a different legal structure" for the IMF, Borges said, adding that such changes had not been discussed with the fund's members.
To many investors, the IMF has far more credibility than the eurozone in how to get a grip on the crisis that is threatening to derail the global economy and trigger another credit crunch, like the one that gripped financial markets in the aftermath of the collapse of Lehman Brothers in 2008.
Signs of a new credit crunch are behind the problems afflicting Franco-Belgian bank Dexia. It's in the spotlight amid mounting expectations that it will be broken up somehow, possibly as soon as Thursday.
Dexia has been at the forefront of investor concerns over its exposure to potentially bad debt from Europe's most indebted countries. With the markets bracing for a Greek debt default soon, investors are concerned about what bonds Europe's banks are holding, and banks themselves have become reluctant to lend to one another.
Over the rest of the week, investors have a raft of economic news to filter as well as any developments surrounding debts.
The European Central Bank and the Bank of England will decide Thursday whether to ease monetary policy again, while the U.S. government payrolls data will be viewed in the context of the recent improvement in U.S. economic data.
In Asia, the mood was less benign, with Japan's Nikkei index closing 0.9 percent lower at 8,382.98 and Korea's Kospi index ending 2.3 percent down at 1,666.52. Stock markets in Hong Kong and mainland China were closed for a holiday.
The more solid tone in European stock markets helped oil prices rebound, too. Benchmark oil for November delivery rose $1.97 to $77.64 a barrel on the New York Mercantile Exchange.
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