Global stocks rose on Thursday and the euro strengthened, backed by upbeat corporate results, better-than-expected U.S. housing data, and an improvement in European manufacturing and services activity.
Expectations before the release of European banks' stress test results appeared to show an easing of concerns as the region's bank stocks ranked among the best performers.
The increase in investors' risk appetite prompted some selling of government bonds, while crude oil gained from a combination of improving data and a weaker U.S. dollar. Gold prices rose modestly, briefly edging back above $1,200.
U.S. existing home sales fell less sharply than expected in June. However the supply of unsold homes rose to the highest amount in almost a year, the National Association of Realtors said.
Existing home sales, while still down, were not down as much as expected. It's still a horrible number. It's just not as horrible as what people were looking for. Do you really view that as good news? Apparently the stock market does, said Mary Ann Hurley, vice president of fixed-income trading, at D.A. Davidson & Co in Seattle.
A gloomy report detailing a bigger-than-expected increase in new U.S. weekly jobless claims and a drop in a private research group's index of leading U.S. economic indicators were overshadowed.
In New York mid-morning trading, the Dow Jones industrial average .DJI rose 215.77 points, or 2.13 percent, to 10,336.30. The Standard & Poor's 500 Index .SPX gained 25.01 points, or 2.34 percent, to 1,094.60. The Nasdaq Composite Index .IXIC climbed 57.23 points, or 2.62 percent, at 2,244.56.
Earnings of UPS, the world's largest package delivery company, soared 90 percent in the second quarter to $845 million. UPS shares shot up 6.53 percent to $63.93 (UPS.N).
Caterpillar, the world's largest maker of construction and mining equipment, reported second-quarter profit of $707 million, or $1.09 a share, which exceeded analysts' expectations. Caterpillar shares gained 1.88 percent to $68.13 (CAT.N).
While Caterpillar raised its full-year outlook, citing sales growth in emerging market mining and energy companies, the bellwether company and Dow component cited significant economic concerns, including the risk of a double-dip recession in Europe and the United States.
RALLY IN EUROPEAN BANK SHARES
In Europe, the pan-European FTSEurofirst 300 .FTEU3 index of top shares rose 2.02 percent to 1,038.62.
European banks' shares advanced, with the sector focused on the outcome of stress tests on how 91 banks would cope with another economic slump and losses on government debt in the wake of the euro-zone sovereign debt crisis.
Shares of Barclays (BARC.L), HSBC (HSBA.L), Societe Generale (SOGN.PA) and Deutsche Bank (DBKGn.DE) were up 2.5 percent and 5.6 percent.
Major listed lenders are expected to pass, while the tests may show the biggest problems lie with smaller, mainly unlisted players like Germany's Landesbanks and Spain's cajas.
There is hope that the stress test will take away a lot of uncertainty surrounding European banks, but you have to take into account that the ECB would not publish these results if it would be a failure overall, said Koen de Leus, aneconomist at KBC Securities.
The MSCI world equity index .MIWD00000PUS gained 2 percent and the Thomson Reuters global stock index .TRXFLDGLPU rose 1.9 percent. Tokyo's Nikkei .N225 fell for a fifth day, off 0.6 percent.
DOLLAR FEELS THE HEAT
The dollar and U.S. Treasury bond yields came under pressure on the prospect of further U.S. monetary easing.
Federal Reserve Chairman Ben Bernanke had said on Wednesday the Fed stood ready to ease monetary policy further if the budding U.S. economic recovery withers, describing the outlook as unusually uncertain.
The U.S. dollar index .DXY fell 1.10 percent against a basket of major trading-partner currencies.
The euro rose 1.26 percent to $1.2917 EUR= after a survey showed the euro zone's private sector surged in July.
European purchasing managers' indexes showed private- sector business activity accelerated in July, surprising economists who had expected a slowdown, and indicating third-quarter euro-zone growth of around 0.6 percent to 0.7 percent, analysts said.
But the greenback clawed back ground against the yen after the housing data, rising 0.14 percent to 87.18 JPY=.
Two-year U.S. Treasury note yields briefly matched a record low of 0.556 percent US2YT=RR hit the previous day, before rising back to 0.589 percent. The benchmark 10-year Treasury note fell 18/32 of a point in price, pushing the yield up to 2.95 percent US10YT=RR.
In Europe, Bund futures FGBLc1 slid to a session low of 128.75, down 16 ticks on the day.
U.S. light sweet crude oil futures CLc1 rose $2.27, or nearly 3 percent, to $78.83 per barrel.
Spot gold prices XAU= rose $12.30 to $1,197.80 an ounce. (Reporting by Daniel Bases; Additional reporting by Wanfeng Zhou, Harpreet Bhal, Natsuko Waki, Tricia Wright; Editing by Jan Paschal)