Optimism on Euro Zone Deal Buoys Stocks and Bonds

Confidence that European leaders will come up with a credible plan to lead the region out of its debt crisis at a crucial summit meeting this week lifted world stocks and gave troubled euro zone bond prices a boost on Monday.

The positive mood looked set to add to the glow from American jobs data last week. The Standard & Poor’s 500-stock index rose more than 1 percent at the opening of trading on Wall Street, and increases in European market indexes ranged from 0.8 percent to almost 3 percent.

“The U.S. economy has been resilient to market turmoil of recent months but remains vulnerable to a deterioration in Europe,” Julia Coronado, chief economist of BNP Paribas North America, wrote in a note to clients.

Market sentiment was given an early boost after Italy announced a 30-billion-euro package of austerity measures, and the Irish government said it would do something similar in a new budget to be announced later in the day.

The positive mood drove Italian bond yields further below the worrying 7 percent level at which they were seen as unsustainable, and the cost of insuring Italian debt against default also fell.

The poor state of the overall euro zone economy, however, was underlined by business surveys suggesting there would be a steep economic contraction this quarter.

Despite the surveys, retail sales data for October came in better than expected.

Shares in financial institutions led the gains in Europe, with the main euro zone banking index now up 23 percent from its lows in November.

The week ahead promises a series of meetings among European leaders seen as crucial to the future of the 17-nation euro zone.

President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany met on Monday in Paris ahead of a crucial meeting of European Union leaders later in the week to address differences on how to centralize control of euro zone budgets in an effort to resolve the region’s debt crisis.

The two leaders are expected to outline joint proposals for more coercive budget discipline in the euro zone; they plan to seek approval from the leaders of all 27 European Union nations at the summit meeting on Friday.

An agreement could pave the way for an accelerated implementation of the rescue plan to help ensure heavily endebted countries have a vehicle to tap for funds while encouraging bondholders to buy euro zone bonds.

On Tuesday, Treasury Secretary Timothy F. Geithner is to begin a visit to the region in Germany, where he will meet the European Central Bank president, Mario Draghi, and government officials.

In a further sign that Europe is making progress, four unidentified people told Reuters that Germany was prepared to soften language in the euro zone’s permanent bailout mechanism compelling bondholders to accept losses in exchange for much stricter budget rules.

World stocks were up about 1.2 percent, according to the market researcher MSCI. Earlier, the Nikkei in Japan closed up 0.6 percent.

The euro, which gained 0.8 percent last week, was up slightly against the dollar, at $1.344. That is about 1.4 percent above its seven-week low of $1.3213 late last month.

“The market wants to see some kind of concrete agreement before investors are prepared to liquidate short positions,” said Niels Christensen, currency strategist at Nordea in Copenhagen.

“I see the euro trading sideways for now,” he added. “We may need to see negative news that there won’t be any fresh agreement for it to test last week’s lows.”

In fixed-income markets, yields on Italian government bonds fell across the curve on Monday, and the price of insuring against a default was also lower after the country’s austerity measures were approved.

Short-term Italian bond yields were down more than 80 basis points, and yields on 10-year notes were 49 basis points lower, at 6.25 percent, well below the 7 percent level that caused such concern in November.