Equities on both sides of the Atlantic gained overnight amid hope the US Federal Reserve will announce further stimulus measures tomorrow, while Germany showed stronger-than-expected investor confidence.
A two-day meeting by Federal Reserve policy makers began today and investors are betting they will decide to extend and expand their help to revive the world's largest economy.
"The main focus is the Fed meeting," Markus Huber, head of German sales trading at ETX Capital in London, told Bloomberg News. "A majority expect the Fed to increase its bond-purchase program, in terms of the amount that they buy each month. The Fed is concerned that with the fiscal cliff, the economy could be negatively impacted so it may consider more stimulus."
The latest evidence of the need for help came in a report today that showed that the US trade deficit rose 4.9 per cent to US$42.2 billion in October. Imports fell to the lowest level in 1-1/2 years, while exports suffered the biggest percentage drop since January 2009.
"The report tells a tale of weakening economic growth momentum both domestically and globally," Millan Mulraine, a senior economist at TD Securities in New York, told Reuters.
In afternoon trading in New York, the Dow Jones Industrial Average gained 0.86 per cent, the Standard & Poor's 500 Index rose 0.97 per cent, while the Nasdaq Composite Index climbed 1.41 per cent.
Underpinning optimism were signs that investors in Europe's largest economy are seeing a brighter outlook. Germany's ZEW Center for European Economic Research said its index of investor and analyst expectations rose to 6.9 in December from minus 15.7 last month. That was far better than the gain to minus 11.5 economists in a Bloomberg survey had anticipated.
Europe's Stoxx 600 Index finished the session with a 0.3 per cent advance from the previous close. Elsewhere in the euro zone the mood was positive too. France's CAC rose 0.9 per cent, Germany's DAX increased 0.8 per cent, while the UK's FTSE 100 eked out a 0.1 per cent gain.
And the euro benefitted as well, last up 0.4 per cent to US$1.2990.
Meanwhile, US budget talks are continuing, which some take as a positive sign that an agreement to avoid the fiscal cliff -- and a resulting damper on the American economy - remains in the cards.
House Speaker John Boehner today said he was still "hopeful" a deal can be reached.
So are investors.
"There's speculation of progress on a deal, given that the two sides are still meeting and talking," Walter Todd, chief investment officer of Greenwood Capital Associates in Greenwood, South Carolina, told Bloomberg. "Right now, people want to see a deal, period. There will be quite a relief rally if one's announced."