A burst of confidence in U.S. financial stocks lifted global equities on Tuesday ahead of results for bellwether Goldman Sachs.
The dollar was slightly weaker against major currencies, following a recent trend of falling when appetite for equities and other riskier assets rises.
World stocks as measured by MSCI <.MIWD00000PUS> were up 1 percent and the emerging markets sector index <.MSCIEF> jumped more than 2 percent.
We are going into the earnings season so the optimists will look for signs of a confirmation of recovery, said Jonathan Lawlor, head of European research at Fox-Pitt, Kelton.
Wall Street rallied more than 2 percent on Monday after bullish comments on financial sector performance by analyst Meredith Whitney lifted hopes that banks' quarterly results may be stronger than expected.
At the same time, the VIX <.VIX> volatility index, sometimes called the fear gauge, had its biggest daily percentage drop since March 10, the day this year's stock market rally started.
Goldman will release earnings results later on Tuesday, followed by Bank of America Corp, JPMorgan Chase & Co and Citigroup Inc later in the week.
European equities were extending the previous session's sharp gains, lead by banks and miners.
The FTSEurofirst 300 index of top European shares was up 0.8 percent after surging 2 percent on Monday.
Earlier, Japan's Nikkei average gained 2.3 percent to snap a nine-day losing streak.
After a recent bearish run, the market has been looking for an opportunity to rebound, said Yutaka Miura, senior technical analyst at Mizuho Securities.
DOLLAR, YEN PRESSURED
The dollar and yen were under pressure as risk appetite improved on the back of rising equity prices.
Currencies perceived as higher risk such as the Australian dollar rose, also buoyed by a robust business conditions report.
The dollar index, a gauge of its performance against six major currencies, fell 0.1 percent to 79.984. <.DXY>
The dollar was flat against the yen at 93.04 yen after hitting a five-month low of 91.73 yen on electronic trading platform EBS on Monday.
The key will be not just the financial sector but other sectors and if they post more optimistic forecasts going forward, said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
Euro zone government bonds were also under pressure.
In the cash market, bond yields, which move inversely to prices, all rose. The two-year Schatz yield climbed almost 5 basis points to 1.267 percent, while the 10-year Bund yield gained 3 basis points to 3.305 percent.
Given the rally we've had, the risk is to the downside, said a bond trader in London.
(Additional reporting by Atul Prakash and Ian Chua; Editing by Ruth Pitchford)