Stocks in major markets rallied on Monday after a survey showed the U.S. manufacturing sector expanded last month for the first time since May and as the results of Spain's bank stress test drove gains in European financial shares.
The euro rose from a three-week low against the dollar after the U.S. data dented demand for safe-haven assets. But U.S. Treasuries prices managed to gain, supported by bond-buying by the Federal Reserve.
The Institute for Supply Management, an industry group, reported that its index of U.S. factory activity rose to 51.5 in September. It was the first time since May that the index topped the 50 threshold that indicates expansion in the sector.
"Numerically, that is a pretty small amount," said Peter Jankovskis, co-chief investment officer at Oakbrook Investments in Lisle, Illinois. "But in terms of looking at the number, it's the difference between seeing contraction and seeing growth. So psychologically that's pretty important."
Federal Reserve Chairman Ben Bernanke said on Monday the U.S. central bank did not foresee a recession but that growth was too slow to bring down the nation's jobless rate. His comments did not move markets.
Earlier on Monday, surveys showed factory output in Europe and Asia wilted again last month, indicating that the euro zone has sunk back into recession and providing more evidence that China's economy suffered a seventh straight quarter of slowing growth.
"Despite a recent spate of weaker-than-expected data from across the world, markets are looking forward. There is a lot of hope that the worst-case scenario is off the table not only for now, but for good," said Adam Sarhan, chief executive of Sarhan Capital in New York.
Wall Street stocks rose after closing out their best third quarter since 2010 on Friday.
The Dow Jones industrial average <.DJI> closed up 77.98 points, or 0.58 percent, to 13,515.11. The Standard & Poor's 500 Index <.SPX> ended up 3.82 points, or 0.27 percent, to 1,444.49. The Nasdaq Composite Index <.IXIC> dropped 2.70 points, or 0.09 percent, to 3,113.53.
A number of blue-chip stocks hit 52-week highs, helping the Dow outperform the broader market. Shares of General Electric hit a 52-week high of $22.99 before closing up 0.4 percent to $22.81. IBM hit a 52-week high at $211.75 and The Travelers Co rose as high as $69.48. IBM shares closed up 1.5 percent at $210.47 and The Travelers gained 1.2 percent to $69.07.
The MSCI global stock index <.MIWD00000PUS> rose 0.5 percent to 333.13. The FTSEurofirst-300 index of pan-European shares <.FTEU3> rose 1.42 percent to end at 1,104.71 points.
The results of the Spanish bank stress test, which were released after the close of European markets on Friday, showed that troubles in the sector were no worse than feared, although uncertainty remained about when Madrid will request a bailout from the European Union.
Spain is ready to request a euro zone bailout for its public finances as early as next weekend, but Germany has signaled that it should hold off, European officials said on Monday.
Spanish banks will need 59.3 billion euros in extra capital to ride out a serious economic downturn, an independent report showed late on Friday, matching market expectations. The country is expected to need international help to meet its debt financing needs.
Investors were awaiting the outcome of credit agency Moody's review of Spain's sovereign debt rating. Spain, Europe's fourth largest economy, may be downgraded to junk status, piling pressure on it to seek an international bailout soon.
"A downgrade could force Spain's hand in seeking a bailout and should see a relief rally in the euro," said Adam Myers, senior foreign exchange strategist at Credit Agricole. "But until that happens, weak economic data will add to the downward pressure on the euro."
The euro rose 0.3 percent to $1.2890. Against the yen, the dollar was up 0.1 percent at 77.99 yen.
The benchmark 10-year U.S. Treasury note was up 5/32 in price, with the yield at 1.6146 percent. Hedging related to corporate issuance also supported Treasuries, after General Electric launched a $7 billion sale of bonds.
Brent crude oil slipped 20 cents to settle at $112.19. U.S. crude rose 29 cents to settle at $92.48.
Gold rallied to a near one-year high to about $1,777 an ounce. The spot price of bullion peaked above the $1,790 an ounce level last seen in November 2011.
(Additional reporting by Edward Krudy, Rodrigo Campos, Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)