European stocks and the euro rose on Wednesday on optimism that policymakers will take major steps at a summit this weekend to tackle the festering debt crisis, offsetting the market impact of a cut in Spain's sovereign credit rating.
German Bund futures were lower as safe-haven government bonds were sold off on a report in Britain's Guardian newspaper that France and Germany had agreed on a deal to increase the euro zone bailout fund's firepower fivefold.
The reported agreement was later denied by two senior European Union officials.
Nevertheless, the FTSEurofirst 300 .FTEU3 index of top European shares was up 1 percent while world stocks as measured by the MSCI index .MIWD00000PUS were up 0.85 percent.
It's interesting that despite the denial the market still wants to go higher, which implies the market does think there's something in the pipeline, said Jeremy Batstone-Carr, strategist at Charles Stanley, said.
We'll see more whipsawing in the market in the run-up to Sunday.
The pan-European benchmark is up more than 13 percent from a September low with the latest gains driven by banking stocks. U.S. stock futures pointed to a mixed start on Wall Street with the S&P and Dow Jones futures both up 0.1 percent while the Nasdaq 100 was down 0.4 percent.
Investors were still cautious about the degree of progress policymakers will make at an EU summit on Sunday.
Carrying on from some low-key comments from German officials on Monday, Chancellor Angela Merkel said on Tuesday the meeting would be an important step but warned that one summit would not be enough to resolve the crisis.
Indeed, U.S. banks' earnings underscored the damage inflicted by the euro zone uncertainty and the financial market turmoil, with Goldman Sachs Group Inc posting its second quarterly loss as a public company on Tuesday. Morgan Stanley and American Express are due to announce their results on Wednesday.
SPANISH RATING CUT
Moody's, one of the big three ratings agencies, on Tuesday cut Spain's sovereign rating by two notches, saying high levels of debt in the banking and corporate sectors leave the country vulnerable to funding stresses.
That followed a statement by Moody's on Monday saying that it would scrutinize its stable outlook on France's triple-A credit rating.
Despite the downgrade, the cost of insuring against a Spanish default fell, according to monitor Markit. Italian CDS prices also narrowed 14 basis points to 435 basis points.
The euro recovered earlier losses made on Moody's downgrade of Spain and was last up 0.9 percent at $1.3860. The dollar index .DXY, which measures the U.S. currency against six major currencies .DXY, was down 0.68 percent.
The euro may have set itself up for a fall, said Jane Foley, senior currency strategist at Rabobank. There is clear risk that this weekend's crucial leaders' meeting will provide disappointment.
Bund futures extended losses after a German 10-year bond sale met weak demand.
Investors also retreated from another safe-haven asset, gold. Spot gold was bid at $1,653.30 a troy ounce, down from $1,658.64 an ounce late on Tuesday in New York.