World shares hit their highest level in a week on Thursday and the euro jumped after China cut interest rates for the first time in four years, boosting speculation the United States might also embark on a monetary stimulus.
The 25 basis point cut in China's benchmark interest rates sent U.S. stock index futures sharply higher, pushed the euro above $1.26 to the dollar and sent Brent crude oil back above $100 a barrel.
"A cut of 25 basis points is not massive by any means, but it does assist and signals that central banks are there and looking to support the economy when needed," said Keith Bowman, equity analyst at Hargreaves Lansdown.
Since last week's U.S. job data, there has been rising speculation of more stimulus measures from global central banks, though the European Central Bank had dashed hopes that it would take any near-term action on Wednesday.
The improved appetite for riskier assets has also been linked to reports that German and EU officials are working urgently on a plan to fix Spain's troubled banking system and moving closer to outlining a broad plan to deal with Europe's crisis.
Much now depends on what Fed Chairman Ben Bernanke will say in testimony to a congressional committee later on Thursday.
The case for action by the Fed was laid out by the central bank's second most senior official, Janet Yellen, in a speech on Wednesday that highlighted the risks to the economic recovery from ongoing housing problems, a weak job market and worsening financial conditions.
The speculation that some form of central bank easing is likely lifted the MSCI world equity index 0.5% to 301.63 points, extending its gains to about 3 percent this week and putting it on track for the best weekly performance since late January.
The FTSE Eurofirst 300 index of top European shares was up 1.2% at 985.94.
"China's move should help support the stocks rally that we have seen in the market over the past days. But the whole European scenario still overhangs," Bowman said.
The euro hit a high of $1.2601, its highest since May 28 and about 2.5% above a two-year low of $1.2288 hit last week.
Europe gears up
Sentiment in risk asset markets had been improving before the Chinese rate cut as reports indicated that Germany was working more urgently with EU officials to tackle Spain's banking crisis and maybe softening its opposition to other moves to share responsibility for the region's huge mountain of debt.
German Chancellor Angela Merkel has tried to play down expectations that a master plan for the future of Europe would emerge at a leaders summit scheduled for the end of the month but said it would come up with an agenda to integrate further.
"Details of the plan remain unknown. But the Chancellor said she is in favour of a two-speed Europe, namely, not forcing, but giving everybody the option to participate," said Evelyn Herrmann, European Economist at BNP Paribas.
The better tone in the markets allowed Spain to sell 2.1 billion euros of fresh debt on Thursday, just days after the country's Treasury minister warned that access to the credit markets was under threat.
The average yield for the 10-year bond at the auction rose to 6.044% from 5.743 percent when the bond was last sold on April 19, though the value of the bids was 3.3 times the amount on offer, up from 2.4 times at the previous sale.
"It's a strong auction, no doubt helped by the relatively small size," said Peter Chatwell, rate strategist at Credit Agricole.
Yields initially fell 10 basis points on Spain's existing 10-year bonds after the auction to 6.2%.
But a day after the ECB indicated it was not planning any near-term action to help Europe's struggling economy, investors continued to seek refuge in the relative security of French debt.
The yield on France's benchmark 10-year bond fell to a record low of 2.46% at its auction of new bonds.
Commodity markets followed the euro and shares higher on the Chinese rate cut announcement, which will increase hopes of greater demand for oil and other industrial materials.
Brent crude, which had hit a low of $99.62 a barrel earlier, rose 63 cents to $101.25. U.S. crude was trading up about $1 a barrel at $86.
Spot gold was up 0.3% at $1,625.36 an ounce.