LONDON World shares hit a three-week high and commodities gained on Thursday on optimism that U.S. political leaders would eventually reach a deal to avoid a fiscal crisis which threatens to derail growth in the world's biggest economy.
The "fiscal cliff" - automatic spending cuts and tax increases early in 2013 unless Congress agrees an alternative - is the biggest risk facing markets in the final weeks of the year after a deal to help Greece was agreed earlier this week.
President Barack Obama and the top Republican in Congress, House Speaker John Boehner, both expressed hopes on Wednesday that a deal could be reached, though other lawmakers have said any solution remains some way off.
The optimistic comments were enough to prompt buying across world equity markets which sent the MSCI global equities index up 0.6 percent to 330.74 points, its highest level since November 7.
In Europe the FTSE Eurofirst 300 index rose 0.8 percent with gains of between 0.7 and 1.0 percent posted by London's FTSE 100, Paris's CAC-40 .FCHI and Frankfurt's DAX.
"One minute the portents for a deal on the fiscal cliff are negative, the next minute they are positive. This is likely to be the pattern all the way up to the deadline on January 1," said Mike Mason, a senior trader at Sucden Financial Private Clients.
U.S. stock index futures also pointed to further gains when Wall St reopens, with the S&P 500 contract up 0.6 percent and adding to gains in the underlying index of 0.8 percent on Wednesday.
"Equities are sure to remain volatile and trading subdued until there is any concrete outcome to these negotiations," Mason said.
U.S. Treasury Secretary Tim Geithner is due to meet with House and Senate leaders from both parties on Thursday to keep up pressure for a deal with less than a month left to reach a compromise.
U.S. Federal Budget: link.reuters.com/vyf93t
U.S. Fiscal Cliff: link.reuters.com/dut83t
Euro zone gov't funding: r.reuters.com/kyd97r
As investors returned to riskier assets, the other side of the coin was a retreat from safe-haven German government bonds, pushing benchmark 10-year debt yields up two basis points to 1.39 percent
The better tone allowed Italy to auction successfully six billion euros of new 5- and 10- year debt, which was expected to complete its funding needs for the year. The yield on the 10-year bond was 4.45 percent, the lowest since November 2010.
"Clearly demand is very strong. You could almost say flamboyant," said Michael Leister, interest rate strategist at Commerzbank in London. "The hunt for yield continues and the market seems very happy to leave Greece and other question markets like Spain and the U.S. fiscal cliff aside and look at the glass almost full, not even half full."
Demand for Italian debt was also supported by evidence of rising consumer and business sentiment across the euro zone.
The European Commission's monthly business and consumer survey showed on Thursday that morale in the region improved for the first time in almost a year in November. Its economic sentiment index rose 1.4 points to 85.7, ending an eight-month run of falls.
However, the survey also revealed stagnant investment plans for next year, dampening any hope of a quick recovery from recession, while German data showed unemployment rising for an eighth month running in November.
After all the data, the euro was still up 0.3 percent at $1.2990, as the hopes for a U.S. fiscal deal supported the common currency.
The dollar, which had pulled back against the yen in a correction from a 7-1/2 month high, edged up 0.1 percent to about 82.15 yen.
Commodity markets also got some support from the U.S. fiscal deal hopes. Crude oil futures rose 70 cents to $87.19 a barrel, and Brent edged up 73 cents to $110.24.
Spot gold was up 0.25 percent at $1,723.65 an ounce although this followed a 1.3 percent tumble on Wednesday, its biggest daily decline in nearly four weeks.
(Additional reporting by Marc Jones, Jon Hopklins and William James. Editing by Will Waterman and Davis Stamp)
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