The Federal Reserve's new plan to stimulate the U.S. economy and progress on tackling the euro zone crisis spurred a strong rally in risk assets on Friday, pushing global stocks to a 13-month high and sending Spanish and Italian bond yields lower.
European equities surged to a 14-month high with London's FTSE, Paris's CAC-40 and Frankfurt's DAX all well up, helping to lift the MSCI index of global stocks to 338.63, its highest level since August last year.
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On the bond market, yields on 10-year Italian government bonds fell below five percent for the first time since late March as the Fed's announcement on Thursday compounded the recent improvement in sentiment towards riskier assets.
The Fed's decision to pump $40 billion into the economy each month until the weak U.S. jobs market turns up bolstered the positive mood which has dominated markets since the European Central Bank announced its own plan to cut borrowing costs of struggling euro zone members.
"There is a risk-on mood across the board at the moment, that (has to do with) the Fed but certainly it still echoes from the ECB," Rainer Guntermann, strategist at Commerzbank said.
Euro zone finance ministers were also meeting in Cyprus, hoping to build on progress the bloc has made this month, following the plans announced by ECB President Mario Draghi and a German court's green light this week for the euro zone's new ESM bailout fund.
Spain was being pressed to clarify whether it will seek the financial support which would clear the way for the ECB to buy its bonds. Questions remain whether Madrid could be tempted by the recent drop in its borrowing costs to tough it out without a politically unpopular EU bailout programme.
"I'd like them to set out their position because it hasn't been clear over the summer what their position is," Irish Finance Minister Michael Noonan told reporters, reflecting concern among several euro zone countries that uncertainty over Spain is holding back a recovery from the bloc's debt crisis.
On Wall Street, the Standard & Poor's 500 Index had its highest close on Thursday since December 2007 after the Fed's announcement of new bond purchases.
The dollar index measured against a basket of currencies fell to its lowest in over four months at 78.949. The Fed's quantitative easing plan equates to printing money and diluting the value of the currency.
The dollar's broad decline left the euro at a four-month high above $1.30, the latest in a string of technical and psychological levels it has cut through this week.
"With Europe getting their act together (at least temporarily), the Fed flooding the market with cash, and China talking (about) stimulatory infrastructure projects, the three largest influences of market dynamics could be creating a bull market for at least the near term," Neal Gilbert, currency strategist at GFT Forex.
Shanghai commodities futures, from copper to zinc jumped between 3 and 5 percent on hopes the Fed's move would bolster global demand for manufacturing and building materials. Oil moved towards $117 a barrel.
Gold rose to a 6-1/2-month high of $1,777.51 an ounce, leaving in on course for is fourth week of consecutive rises and on top of Thursday's 2 percent gain.
Stimulus measures like those announced by the Fed and ECB tend to give a twin boost for precious metals as they can benefit both from better global demand and their reputation as protection against inflation.
Demand for German government bonds and U.S. treasuries, typically favoured by investors seeking lower risk, extended recent falls.
Ten-year Italian yields fell below 5 percent for the first time since March 26 and were down 6 basis points on the day at 4.97 percent. Equivalent Spanish yields shed 3.5 bps to 5.64 percent.
"Five percent (Italian yield) is certainly eye-catching but the key level from a technical point of view is 4.7 so we still have to be cautious here," said Piet Lammens at KBC in Brussels.
"If it drops below that level I would interpret it as the market basically seeing Draghi's move as a game changer," he said, adding it was also important to see how aggressively the ECB used its new bond buying "bazooka".
Analysts are now wondering whether the positive momentum can be sustained. "In the next weeks or months it is not so easy to see what is going to drive the markets up further," said Heinz-Gerd Sonnenschein at Postbank in Frankfurt.
"The ECB and the Fed have given market participants what they wanted, we have had the positive German court ruling on the ESM so now the fundamentals will be back in focus."