Equities advanced amid optimism that new measures by policy makers in Europe might help contain the debt crisis from spreading into a full-blown recession.
While Jean-Claude Trichet disappointed investors by not lowering interest rates in his final appearance as president of the European Central Bank, they did welcome the ECB’s plans to provide a backstop for the region’s banks struggling with the fiscal crisis in Greece, Italy and other EU member nations.
The central bank said it would revive 12-month loan operations and purchases of covered bonds. Separately, the Bank of England expanded its bond-purchase program.
Meanwhile, the EU's executive arm said it would present a plan for member states to coordinate a recapitalisation of their banks, as regulators met in London to reassess the capital buffers of stressed lenders that received a clean bill of health in July, according to Reuters.
"We are now proposing member states to have a coordinated action to recapitalise banks and so to get rid of toxic assets they may have," European Commission President Jose Manuel Barroso said in a television interview relayed on YouTube, according to Reuters.
The Stoxx 600 Index ended the day with a 2.7% gain.
In afternoon trading in New York, the Dow Jones Industrial Average gained 1.01%, the Standard & Poor's 500 Index rose 1.10% and the Nasdaq Composite Index advanced 1.23%.
"The markets are more worried about disinflation and recession than they are about inflation, so the celebration would have been stronger if they reduced interest rates," Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville, told Reuters.
A relatively bright note on the world’s largest economy came as applications for jobless benefits rose by 6,000 in the week ended October 1 to 401,000, less than the 410,000 claims predicted by economists in a Bloomberg News survey.
The report though does little to change the long-term labour outlook. The latest monthly government report is due tomorrow. Employers added 59,000 workers to payrolls in September and the unemployment rate held at 9.1%, according to the median forecast of economists compiled by Bloomberg.
The U.S. housing market also remains sluggish. Mortgage rates in the U.S. fell, sending longer-term borrowing costs below 4% for the first time on record.
The average rate for a 30-year fixed loan dropped to 3.94% in the week ended today from 4.01%, Freddie Mac said in a statement.
The U.S. economy is not slipping back into recession but will face a long, slow recovery as political gridlock in Washington and Europe make businesses wary of investing, according to General Electric Co's Jeff Immelt and other top executives.
"Recovery is underway, but it's a long, slow recovery. Slower than we'd like," the head of GE told a group of about 500 executives from mid-sized U.S. companies.