Stocks rose in Europe and the US overnight and Treasury bonds fell amid hopes Europe will find a way to tackle its sovereign debt crisis, even while leaders in the region are divided.
The Standard & Poor's 500 Index gained 0.6 per cent in afternoon trading. Germany's DAX 30 climbed 2.9 per cent and the region-wide Stoxx Europe 600 Index gained 1.9 per cent. The yield on 10-year US Treasuries rose 7 basis points to 7.9 per cent.
Insurers and banks were among the biggest gainers in European equity markets. Allianz jumped 10 per cent, Deutsche Bank rose 8.7 per cent and Commerzbank gained 7.8 per cent. Axa rose 8.2 per cent.
JPMorgan Chase said Europe's banks need at least 150 billion euros of capital support which could be delivered in the same way as the US TARP scheme.
Gold for December delivery fell below US$1,600 an ounce on the New York Mercantile Exchange. The precious metal has been one of the main beneficiaries of investors' flight to safety. Crude for November delivery rose above US$81 a barrel on hopes progress in Europe will help put the global economy back on a growth path.
Policymakers at the European Central Bank will consider resuming purchases of covered bonds and reintroduce 12-month loans to banks among measures to eased monetary policy in the region, Bloomberg reported, citing an ECB official.
Yet there is some scepticism Europe is in any hurry to resolve a crisis that threatens to drag down the global economy.
German Finance Minister Wolfgang Schaeuble poured cold water on a proposal to lift the European Financial Stability Facility above 440 billion euros, a step urged by observers including US Treasury secretary Timothy Geithner.
Finland and the Netherlands also indicated they don't plan to contribute to an increase in the EFSF.
Schaeuble's comments appeared to be at odds with those of German Chancellor Angela Merkel, who said a 'firewall' needed to be put around Greece to prevent contagion in the region and said the EFSF needed to be expanded.
Meantime, China's central bank governor Zhou Xiaochuan said it is too soon for his country to consider coordinated aid to Europe while he awaits signs the region can resolve its impasse over the size of its bailout fund.
Mohamed El-Erian, chief executive at Pacific Investment Management, or Pimco, which manages the world's biggest bond fund, said he sees European sinking back into recession, stalling growth among other developed economies, according to Bloomberg.
The euro weakened against the yen and the greenback, touching the lowest level in a decade against Japan's currency, one of the few remaining 'safe haven' assets to retain support.
The euro fell to 102.81 yen and traded at $1.3442 against the greenback. The yen traded at 76.48 per dollar, near its strongest-ever level.
"The situation in Europe is a near term risk, but if the global economy muddles through, you'll probably have room for a rally in stocks," Russ Koesterich, chief investment strategist for the IShares unit of BlackRock Inc., told Bloomberg. He described comments from European leaders as "quasi-positive."
Economic figures out of the US remained weak and capped gains in US stocks.
New home purchases fell to a six-month low in August. Sales fell 2.3 per cent to an annual rate of 295,000, according to the Commerce Department, close to economist expectations. The median price was US$209,100, down 10 per cent from a year earlier.