European shares hit a six-week closing high yesterday, buoyed by gains in financial and commodity stocks, which spiralled higher after a sharp cut in US interest rates aimed at preventing an economic slowdown.
The pan-European FTSEurofirst 300 index ended up 2.61 per cent at 1,549.13 points, its highest close since August 8.
Equity markets around the world powered higher after the US Federal Reserve slashed its benchmark federal funds rate by half a percentage point on Tuesday to help prevent an economic slowdown.
This boosted mining and oil stocks such as Anglo American, BP, Total and Royal Dutch Shell, which were among the heaviest weighted gainers in the FTSEurofirst.
Financials stocks, having borne the brunt of a recent equity sell-off, joined the rally with Societe Generale gaining 6.9 per cent, UBS adding 3.6 per cent and BNP Paribas up 5.1 per cent.
"The Fed's rate cut sent a psychologically positive signal to the markets," said Tammo Greetfeld, strategist at UniCredit. "It showed that the Fed is ready to act and that it wants to curb growth risks."
UniCredit expects another cut of the US benchmark interest rate by a quarter percentage point in October.
This is in line with a Reuters survey taken shortly after the Fed's rate decision, which showed that 12 out of 18 primary dealers polled expect a quarter-point rate cut in October. Six dealers expect a rate cut in December.
It now remained to be seen how credit markets develop from here, Mr Greetfeld said. "The move eases the problems in the banking sector but does not solve them," he added.
Disappointing third-quarter results from US investment bank Morgan Stanley served as a reminder that equities weren't out of the woods just yet.
Morgan Stanley was the second major investment bank this week to report earnings, coming hot on the heels of Lehman Brothers, which reported earnings that beat Wall Street's estimates on Tuesday.
Today quarterly results are expected from Bear Stearns and Goldman Sachs.
Around Europe, Germany's DAX index added 2.3 per cent, France's CAC 40 jumped 3.4 per cent and the UK's FTSE 100 index rose 2.8 per cent.
Embattled British bank Northern Rock bucked the trend with its shares falling 16 per cent, as speculation of a cut-price takeover bid combined with stake sales from two investors stoked concerns over its future.
On the upside miners such as Anglo American rose 8.3 per cent, BHP Billiton added 6.3 per cent and Rio Tinto gained 5.8 per cent as copper futures prices rose more than three per cent.
Commodity prices surged on the back of the Fed's rate cut with US crude oil extending gains to set a record peak above $82 a barrel after a bigger than expected drop in inventories, while spot gold prices neared a 28-year high.
The Fed slashed benchmark US interest rates, taking the overnight federal funds rate down to 4.75 per cent, its lowest since last May. It also lowered the discount rate, which it charges for direct loans to banks, also by a half-point, to 5.25 per cent.
"No one had expected that (Bernanke) would open his wallet to that extend," one trader said. "We have to wait and see whether this is enough," he added.