Hopes that Greece will reach a deal with private creditors on lowering its debt _ despite a delay in talks between Athens and banks' representatives _ supported European markets on Monday and sent the euro up to three-week highs above $1.30.
The deal being thrashed out would see private creditors swapping their old Greek bonds for ones with a 50 percent lower face value. The new bonds would also have much longer maturities, pushing repayments decades into the future, and a much lower interest rate than Greece would currently have to pay on the market.
Issues over the interest rates on the bonds lie behind the delay. However, the Greek government and representatives for the private creditors insist that the talks have not broken down and that they are moving closer to a final deal.
Greece, which is negotiating alongside fellow eurozone nations and the International Monetary Fund _ its bailout rescuers _ wants interest rates as low as 3 percent on the new bonds. But the private creditors, which include banks and other investors, believe that is too low and are aiming for about 4.5 percent.
French Finance Minister Francois Baroin said a deal "seems to be emerging" after meeting with his German counterpart Wolfgang Schaeuble ahead of the eurozone finance ministers' meeting in Brussels later Monday.
Expectations of a breakthrough have heartened investors and boosted assets that are considered riskier. The euro was the main beneficiary, climbing a further 1.3 percent to $1.3039, its highest level since Jan. 4.
An agreement is necessary if Greece is to get the next batch of bailout cash that would prevent a devastating debt default. Greece does not have enough money to cover a euro14.5 billion ($18.7 billion) bond repayment in March. A deal would allow the country to receive a second bailout package from other European governments and the IMF, and cut Greece's debt from an estimated 160 percent of its annual economic output to 120 percent by 2020.
"Given that any debt swap deal will involve a lot of lawyers, it is estimated that around 5 weeks are needed between agreement and the bond maturing to prevent default," said Louise Cooper, markets analyst at BGC Partners. "This does not leave much wriggle room, although such pressure must focus the minds of all at the negotiating table."
Even though time appears to be running out, investors appear relatively hopeful that a deal will be thrashed out and that's helped shore up markets at the start of a week that also will feature the annual meetings in Davos, Switzerland, and the U.S. Federal Reserve's first rate-setting meeting of the year.
In Europe, the FTSE 100 index of leading British shares closed up 0.9 percent at 5,782.56, while Germany's DAX rose 0.5 percent to 6.436.62. The CAC-40 in France ended 0.5 percent higher at 3,338.42.
In the U.S., trading was more subdued with the Dow Jones industrial average down 0.1 percent at 12,706 and the broader Standard & Poor's 0.1 percent lower at 1,314.
Optimism that Greece will secure a deal as well as a run of successful European bond auctions and solid economic and corporate news, not least from the U.S. and China, have brightened market sentiment this year. Many stock indexes have risen to five-month highs, while the euro has clambered off 17-month dollar lows.
Later in the week, investors will be monitoring the meeting at the Fed.
Though the Fed is expected to keep its super-loose monetary policy unchanged, there will be great interest in the outcome of the meeting. It will be the first time the Fed will be publishing its interest rate forecasts out to 2016, part of a strategy to enhance communication with financial markets.
Investors will be particularly interested to see how long it expects interest rates to remain low. Previously the Fed said it expected to keep them low until the middle of 2013.
"Most, ourselves included, expect the projections to suggest the Fed sees rates on hold well into 2014," said Adam Cole, an analyst at RBC Capital Markets.
In the oil markets, traders are watching developments in the Gulf, too, after the European Union formally adopted an oil embargo against Iran to pressure it to resume talks on its nuclear program.
Iran has threatened to close the Strait of Hormuz, if the U.S. and other countries impose more sanctions on it because of its nuclear program. Many analysts doubt that Iran could set up a blockade for long, but any supply shortages would cause supplies to tighten.
As a result, prices have remained well-supported: benchmark crude was up $1.01 at $99.34 a barrel in electronic trading on the New York Mercantile Exchange.
"We now wait to see whether the Iranians will indeed retaliate with a closure of the straits, and all the consequences that might result from such an action," said Chris Beauchamp, a market analyst at IG Index.