A well-received auction of Portuguese government debt underpinned a more confident mood in the markets that saw US and European equities return to two-year highs and Brent crude oil push towards the $100-a-barrel mark.
Analysts also said indications that European Union officials were considering significantly boosting the region’s bail-out facility helped improve risk appetite.
However, the response from most analysts to the day’s action remained cautious, particularly as Portugal and Spain still have a hefty debt schedule over the rest of the quarter.
Nevertheless, news that Portugal had overcome its first funding hurdle of the year provided a fillip for nervous investors.
Lisbon sold €599m of bonds due in 2020 at a yield of 6.716 per cent, down from 6.806 per cent at the previous auction in November, and below the 7 per cent widely viewed as the point at which the country might be forced to seek assistance.
“What’s more, the auction was oversubscribed, with bids equal to 3.2 times the value of the sale, perhaps raising hopes that Portugal will not need a bail-out,” noted Ben May at Capital Economics.
Mr May added: “Nonetheless, concerns about the fundamental solvency of the peripheral eurozone governments continue to rise and the fiscal crisis certainly has much further to run.”
Meanwhile, analysts pointed to comments by Olli Rehn, the EU commissioner for economic and monetary affairs, raising the proposition that the region’s bail-out facility be enlarged and revamped to allow it more flexibility.
“This suggests to us that European policymakers might be finally starting to grasp the seriousness of the situation as Italy, Belgium and Spain show increasing signs of strains,” said Jacques Cailloux, chief euro-area economist at RBS.
Yield spreads between peripheral eurozone government bonds and their German counterparts narrowed sharply, as the 10-year Bund yield jumped 12 basis points to 3.05 per cent. Angela Merkel, Germany’s chancellor, said she was ready to do “what is necessary” to support the euro.
In the US, the easing of eurozone concerns helped push the 10-year Treasury bond yield up 3 basis points to 3.37 per cent. It pared losses after a $21bn sale of the benchmark paper.
Meanwhile, the euro climbed back above the $1.31 level in the wake of the Portuguese auction, although sentiment towards the single currency remained fragile. Analysts said an auction of Spanish debt on Thursday could provide a greater test for the euro than the Portuguese sale.
“This will be a truer test of how much contagion has already spread through the system,” said Jane Foley, chief currency strategist at Rabobank.
Stephen Gallo, head of market analysis at Schneider FX, added: “For the short-run only, it may be the case that the recent euro-supportive chatter and pronouncements from the likes of Japan have made the Spanish situation seem a bit more manageable.”
US and European equities powered to fresh 28-month highs as financial stocks rallied on both sides of the Atlantic. The S&P 500 rose 0.9 per cent while the FTSE Eurofirst 300 rose 1.5 per cent.
The Nikkei 225 Average in Tokyo touched an eight-month peak before ending flat, while emerging markets stocks enjoyed their best session for six weeks.
In commodities, Brent crude oil rose more than $1 to trade above $98 a barrel, while US crude on Nymex pushed above $92.
Base metals rallied broadly, with copper pushing back towards the record high of $9,754 a tonne struck at the start of the month, while agricultural commodities attracted broad-based buying. Gold held steady around $1,385 a troy ounce in spite of the weak dollar.
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