LONDON — Stocks rallied Wednesday on hopes that a deal to save the euro would be agreed at a summit of European leaders at the end of the week.
Investors are betting EU leaders will agree on Friday a strategy that will allow the 17 countries that use the euro to link up their economies more closely. The tighter budget rules, proposed by the leaders of Germany and France, could then allow the European Central Bank to play a bigger role in solving the crisis by buying up the bonds of the most-imperiled countries.
"The market is becoming optimistic that the ECB will aggressively step up its action as both a reward for political action or in reaction to the threat of recession," said Jane Foley, an analyst at Rabobank International.
Ahead of Friday's meeting, the ECB is expected to cut interest rates on Thursday, possibly by as much as half a percentage point. If it did sanction such a big move, then the rate would fall to 0.75 percent and below the 1 percent that had previously been considered the floor.
Lower interest rates would help the eurozone economy, which has been sliding back toward recession under the weight of the debt crisis that threatens to spread from the relatively small economies such as Greece to much-bigger Italy and Spain.
Concerns that this could happen have eased this week. That was most evident in the performance of Italian and Spanish bond prices. Both have recovered this week, sending their yields — the interest rates the countries would pay to borrow on markets — down to more manageable rates. The yield on Italy's ten-year bond was at 5.75 percent on Wednesday, way down from the 7 percent level it had traded at in recent weeks.
In Europe, Germany's DAX rose 0.4 percent to 6,051 while the CAC-40 in France rose 1 percent to 3,212. The FTSE 100 index of leading British shares was 0.4 percent higher at 5,593.
Wall Street was poised for a solid opening too — Dow futures were up 0.5 percent at 12,176 while the broader Standard & Poor's 500 futures rose 0.6 percent to 1,262.
The euro was trading flat on the day at $1.3400.
U.S. Treasury Secretary Timothy Geithner said Wednesday he is very encouraged with the progress Europe is making in coming up with a plan to shore up the euro in the wake of a crippling debt crisis. Geithner's comments to reporters followed a meeting with French Finance Minister Francois Baroin on the second day of his whirlwind trip through Europe.
"A more upbeat tone from Geithner in his support for Europe's efforts to unify fiscal policy across the eurozone has been well received by investors," said Jordan Lambert, a trader at Spreadex.
Earlier in Asia, Japan's Nikkei 225 jumped 1.7 percent to end at 8,722.17 — its highest close in a month. South Korea's Kospi added 0.9 percent to 1,919.42 and Hong Kong's Hang Seng gained 1.6 percent to 19,240.58.
Mainland Chinese shares edged higher, with the benchmark Shanghai Composite Index climbing 0.3 percent to 2,332.73, ending a five-session losing streak.
Oil prices meanwhile edged higher alongside stocks — benchmark crude for January delivery was up 51 cents to $101.79 a barrel in electronic trading on the New York Mercantile Exchange.
Pamela Sampson in Bangkok contributed to this report.