However, a warning by Moody's that the rapid escalation of the region's sovereign and banking crisis threatens the rating of all European government bonds and caution ahead of next week's key European summit capped gains on the euro and top-rated German bond yields.
Kicking off a mini rally in world stocks after 10 consecutive days of losses was an unsourced report in Italian daily La Stampa. It suggested the International Monetary Fund was preparing a rescue plan for Italy worth up to 600 billion euros ($796 billion). This was later dismissed by an IMF spokesperson.
The IMF report was denied and this brings the market's focus back to how critical a stage the sovereign debt crisis is at, said Jane Foley, senior currency analyst at Rabobank.
The euro looks very vulnerable in a week where there is an awful amount of supply from euro zone countries. Trade will be directional and will be based on how the response is to these auctions.
MSCI world equity index gained 1.5%. The index is down nearly 15% since January and more than 22% since hitting a three-year high in May. European stocks and emerging stocks both rose around 2%.
US stocks opened sharply higher on Monday on hopes that fresh proposals could be emerging out of Europe to help solve the region's debt crisis. Retail stocks rallied after strong sales over the Thanksgiving holiday weekend, with the S&P retail index advancing 3.4%. The Dow Jones industrial average was up 274.96 points, or 2.45%, at 11,506.74. The Standard & Poor's 500 Index was up 29.67 points, or 2.56 %, at 1,188.34.
The Nasdaq Composite Index was up 71.02 points, or 2.91%, at 2,512.53. The market was also expected to get some support from news that US retailers racked up a record $52.4 billion in sales over the Thanksgiving weekend, a 16.4% jump. US crude oil gained 3.7% to $100.33 a barrel.
Hopes for resolution pressured credit default swaps. Five-year Italian CDS fell 23 basis points on the day to 532 bps, according to provider Markit, meaning it now costs 532,000 euros to insure an exposure of 10 million euros worth of Italian debt. Belgian, Spanish, French and German CDS also fell. After the Italian aid report, Italian/German 10-year government bond yield spread tightened 10 basis points to 496 bps. The premium investors pay to hold Belgium's 10-year government bonds rather than German debt fell 13 bps from Friday to 357 bps even after a downgrade in Belgium's credit rating on Friday.
Belgian borrowing costs have increased sharply in past weeks as the country has struggled to set up a government, with the country's benchmark 10-year yield rising near the 6% level on Friday, beyond which financing costs could become unsustainable. A sustained rise in yields is likely to scare some of the long-term euro bond buyers. Reuters