Wall Street climbed after comments by US Federal Reserve Governor Lael Brainard bolstered bets the central bank won't raise interest rates next week.
"In today's new normal, the costs to the economy of greater-than-expected strength in demand are likely to be lower than the costs of significant unexpected weakness," Brainard said in prepared remarks for a speech in Chicago.
"This asymmetry in risk management in today's new normal counsels prudence in the removal of policy accommodation."
The Federal Open Market Committee, of which Brainard is a permanent voting member, begins its next two-day meeting on September 20.
Traders reduced their expectations for a September rate hike to 15 per cent from 24 per cent on Friday and for a December hike to 54.5 per cent from 59.2 per cent, Reuters reported, citing the CME Group's FedWatch tool.
Wall Street breathed a sigh of relief. In 3.08pm trading in New York, the Dow Jones Industrial Average rallied 1.3 per cent, while the Nasdaq Composite Index climbed 1.6 per cent. In 2.53pm trading, the Standard & Poor's 500 Index advanced 1.5 per cent.
Gains in shares of Wal-Mart and those of Procter & Gamble, last up 2.3 per cent and 2.2 per cent respectively, led the Dow higher.
US Treasures briefly rose on Brainard's comments, then fell, pushing yields on the benchmark 10-year note one basis point higher to 1.68 per cent at 1.45pm New York time.
"She didn't change the tone of what she had been saying much, and I think the snap rally was only because the market may have been preparing for a hawkish surprise," Aaron Kohli at BMO Capital Markets Corp, a fixed-income strategist in New York at BMO, one of the Fed's 23 primary dealers, told Bloomberg.
In Europe, the Stoxx 600 Index ended the session with a drop of 1 per cent from the previous close. The UK's FTSE 100 Index declined 1.1 per cent, France's CAC 40 index fell 1.2 per cent, while Germany's DAX index slid 1.3 per cent.
In the latest round of merger and acquisition activity, Canada's Potash Corp of Saskatchewan and Agrium agreed to merge to create the world's largest crop nutrient company.
She didn't change the tone of what she had been saying much, and I think the snap rally was only because the market may have been preparing for a hawkish surprise.
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Following the close of the transaction, expected during mid-2017, Potash Corp shareholders will own about 52 per cent of the new company, and Agrium shareholders will own the remainder.
Agrium shares traded 2.6 per cent lower as of 2.12pm in Toronto, while Potash Corp shares last traded 1 percent weaker as of 2.06pm in Toronto.
"This deal has some real antitrust concerns," Seth Bloom, a US Justice Department veteran who is now at Bloom Strategic Consulting, told Reuters.