NEW YORK (Reuters) - World stocks soared 2 percent and the euro rallied on Wednesday on talk major central banks would act to bolster a slowing global economy.
Brent crude jumped above $100 a barrel, while gold hit a one-month high, leading a broad rally in the commodities sector. Silver soared 4 percent and copper gained 2 percent.
Analysts said markets were reacting to hints of more monetary accommodation from both the European Central Bank - though ECB President Mario Draghi dashed hopes of near term action - and the U.S. Federal Reserve.
U.S. stocks rallied and analysts said the market was ripe for a bounce back after a drop of more than 6 percent in the S&P 500 for May on fears the euro zone crisis was escalating.
Prices on U.S. Treasuries fell for the third day in a row after the benchmark 10-year yield hit an historic low last week.
"Markets have moved a lot and valuations in stocks and a number of the credit sectors are compellingly cheap and the valuation argument for Treasuries and bunds is very thin," said Robert Tipp, chief investment strategist for Prudential Fixed Income with $330 billion in assets under management. "If the Fed and the ECB offer reassurances that they will protect the system, you're likely to see higher stock prices and higher yields."
The European Central Bank resisted pressure to provide immediate support for the euro zone's ailing economy by holding interest rates steady at 1 percent. But in a later statement Draghi noted "increased downside risks to the economic outlook" and saw annual inflation falling below 2 percent in early 2013. The comments supported hopes for more accommodation down the road.
A similar tone was struck by Atlanta Fed President Dennis Lockhart who said the U.S. central bank may need to consider additional monetary easing if a wobbly U.S. economy falters or Europe's troubles generate a broader financial shock.
Fed Chairman Ben Bernanke testifies before the U.S. congressional Joint Economic Committee on Thursday and could provide hints on the possibility of further monetary easing. The Group of 20 economies is scheduled to meet later this month.
"We could well see easing taking place throughout many of the G10 countries," said Ian Stannard, an executive director at Morgan Stanley.. "We believe that quantitative easing from the Fed is also very much back on the table."
Markets were also supported by signs of urgent moves by Germany and the European Union to find ways to rescue Spain's troubled banks.
Spain, the euro zone's fourth-biggest economy, said on Tuesday it was effectively losing access to credit markets due to prohibitive borrowing costs.
"The bounce-back we are seeing over the last two days and today in particular really does make one think we've got the worst of the selloff behind us," said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.
"Keep in mind, although a rally of this type is welcome, nothing has significantly changed," he said.
The Dow Jones industrial average .DJI was up 228.19 points, or 1.88 percent, at 12,356.14. The Standard & Poor's 500 Index .SPX was up 24.98 points, or 1.94 percent, at 1,310.48. The Nasdaq Composite Index .IXIC was up 61.65 points, or 2.22 percent, at 2,839.76.
The MSCI World Equity Index .MIWD00000PUS jumped 2.1 percent for its biggest daily gain since December. The pan-European FTSEurofirst 300 .FTEU3 index rose 2.2 percent.
The euro gained 0.9 percent to $1.2564, well off the near two-year low of $1.2286 set on Friday, as a broad rally in risky assets sent investors scrambling to cover bets against the currency.
"Europe closed and there was a squeeze," said Boris Schlossberg, director of FX Research at GFT in Jersey City, New Jersey.
The dollar rose 0.4 percent to 79.05 yen.
Brent crude surged to an intra-day high of $101.39 a barrel before easing to $101.20, up $2.36. U.S. crude climbed $1.64 to $85.93.
Gold rose more than 1 percent to $1,637 an ounce.
Demand for safe-haven government debt fell. The benchmark 10-year U.S. Treasury note was down 25/32, the yield at 1.6575 percent.
Prices of German Bund futures also fell.
Despite the rally in riskier assets, Germany was able to sell 3.98 billion euros of five-year government bonds at a record low yield of 0.41 percent as investors remained nervous about Spain's banks and the possibility of Greece leaving the euro.
Updated Date: Jun 07, 2012 01:15:07 IST