Stocks regained their composure Thursday as oil prices fell and hopes surged that U.S. employment is picking up. The euro surged after the European Central Bank indicated that an interest rate increase as soon as next month was possible.
Speaking after the bank left its main interest rate at the record low of 1 percent, President Jean-Claude Trichet said "strong vigilance" was warranted and that an interest rate increase next month was "possible" though "not certain."
His hawkish tone was a major surprise. Before Trichet's statement, analysts thought an ECB interest rate increase was months away.
"Before his statement, the general feeling was that an interest rate increase would not come until the end of this year," said Silvio Peruzzo, an analyst at Royal Bank of Scotland.
By mid-afternoon London time, the euro was up 0.6 percent on the day at $1.3950.
Now that the ECB rate decision is out of the way, the markets will be zeroing in on Friday's nonfarm payrolls data for February, which often sets the market tone for the next week or two.
Following Wednesday's forecast-busting monthly survey from the ADP payrolls firm, expectations around the U.S. government report have ratcheted higher. The consensus before the ADP survey was that U.S. employers added around 175,000 jobs. Some analysts now think the actual figure could be up around the 250,000 mark.
Weekly figures from the Labor Department only fueled expectations that the data will come in strong. It said first-time claims for unemployment benefits unexpectedly fell by 20,000 to 368,000 _ their lowest level since May 2008. Economists had expected a rise in claims to 398,000.
"There can be no denial that a strengthening in labor market conditions is underway, as layoffs have dropped sharply since the beginning of the year," aid Jim Baird, chief investment strategist for Plante Moran Financial Advisors. "Coupled with increasing consumer demand, this should translate to a faster pace of job creation in time."
Hovering in the background though is the crisis in Libya as Moammar Gadhafi's regime tries to claw back some ground. Rebels deployed around the strategic oil installation at Brega on Thursday, a day after they foiled an attempt by Gadhafi loyalists to retake control of the port in rebel-held eastern Libya.
Over recent weeks stocks have largely moved in opposite directions to oil prices. That was again the case on Thursday _ stocks rallied while crude prices fell on reports Venezuelan President Hugo Chavez has spoken with Gadhafi about creating a bloc of friendly countries to help mediate a resolution to Libya's crisis.
"Reports that Libya is considering the proposal is providing a boost to markets and taking oil prices lower," said Benjamin Reitzes, an analyst at BMO Capital Markets.
So far, the rebellion has shut down oil production in many parts of the country. While Libya's oil fields produce only about 2 percent of global demand, experts say the disruption is putting pressure on world supplies.
By mid-afternoon London time, a barrel of crude on the New York Mercantile Exchange was trading $1.10 lower at $101.14 a dollar while the equivalent Brent rate in London fell $1.90 to $114.45. Despite the declines, both rates are edging up to last week's levels, when the New York rate hit $102 a barrel and the Brent rate neared $120.
The picture in stock markets was very different, with indexes posting broad-based gains.
In Europe, the FTSE 100 was up 1.5 percent at 6,005 while Germany's DAX rose 1.3 percent to 7,275. The CAC-4o in Paris was 1.2 percent higher at 4,084.
In the U.S., the Dow Jones industrial average was up 129 points at 12,198 soon after the open while the Standard & Poor's 500 index rose nearly 15 points to 1,323.
Earlier in Asia, South Korea's Kospi Composite Index, rose a hefty 2.2 percent to 1,970.66 after the government said industrial output grew for the 19th straight month in January, while Japan's Nikkei 225 stock average climbed 0.9 percent to 10,586.02.
Hong Kong's Hang Seng index was 0.3 percent higher to 23,122.42 but mainland Chinese shares fell as profit taking in the afternoon offset morning gains. The benchmark Shanghai Composite Index lost 0.4 percent to 2,902.98, while the Shenzhen Composite Index lost 1.6 percent to 1,272.00.
Chinese shares will likely remain volatile as investors guess whether recent data showing the economy is growing more slowly than in recent months will pre-empt further inflation-fighting moves by the government, analysts said. The opening of the annual session of the national legislature is adding to the sense of caution.
Pamela Sampson in Bangkok contributed to this story.