Major European stock indexes closed more than 3 percent higher on Tuesday ahead of the Federal Reserve's interest-rate-setting meeting, and after U.S. banks Goldman Sachs and Lehman Brothers reported earnings that beat markets expectations.
The news that Goldman Sachs' profit halved in its fiscal first quarter but still came in better than what analysts had expected and that Lehman's earnings exceeded forecasts gave a boost to U.S. stocks as well.
The bailout of collapsing Bear Stearns sent stocks down across the globe on Monday, but Wall Street managed a late comeback on hopes that the Federal Open Market Committee would slash its overnight lending rate to 2 percent from 3 percent when it meets Tuesday.
The market is now pricing in 100 percent chance of a full-point cut, according to federal funds futures contracts, with a small chance the central bank lowers rates by 125 basis points.
Another cut in the discount rate is also expected.
But the European Central Bank poured some cold water on investors hoping that European rates would follow U.S. rates down. European Central Bank Executive Board members stressed the role of the ECB as a guardian of price stability, outlining their inflation concerns.
At the same time, French businessmen complained again about the strength of the euro, with the head of France's Dassault Aviation warning that if the single currency exceeds $1.6, it could mean bankruptcy for some companies in the aerospace sector.
Banks were the best performing sector, rising more than 6 percent, while autos were up more than 4 percent.
The mining sector was also one of the highest performers, with the Dow Jones Stoxx basic resources index up nearly 3 percent, after Chinalco's chairman said the company is in talks with partner Alcoa about raising its stake in Rio Tinto and is planning further overseas investments.
On the earnings front, Germany's Metro traded more than 6 percent down after the retailer's CEO announced plans to turn around its Real hypermarkets within two years and said it could sell its galleria Kaufhof department stores.
Metro's 2007 sales grew 10.4 percent from the year ago to $101.4 billion.
And UK insurer Legal & General reported its 2007 profit fell 26 percent, missing analysts' forecasts, after it was hit by a $539 million charge to adjust for longer UK life expectancies.