NEW YORK (Reuters) - U.S. stocks rallied on Tuesday as progress on a U.S. budget-reduction deal and strong earnings gave investors reasons to be optimistic about the economy, while the euro and European shares rose ahead of an EU summit later this week.
Some investors are hopeful the EU summit could pave the way for a deal to solve Greece’s debt problems.
Encouraging remarks from U.S. President Barack Obama that some progress was made toward a budget-reduction deal and raising the statutory $14.3 trillion federal debt ceiling propelled U.S. stocks higher.
A surprising jump in U.S. housing starts in June helped reduce concern that the U.S. economy may be slipping into a recession.
Crude oil prices jumped as optimism about the economy underpinned the outlook for energy demand, and the weaker dollar also supported prices. Prices of both Brent crude and U.S. oil rose more than 1 percent.
“So far, earnings have been showing us a better picture of the economy than some macroeconomic issues suggest, which is encouraging, especially with housing starts surprising to the upside,” said Michelle Gibley, senior market analyst at Schwab Center for Financial Research in Denver.
In European equities markets, banking shares bounced back from two-year lows ahead of Thursday’s euro-zone summit in Brussels on hopes the leaders will approve a second bailout for Greece worth 110 billion euros to help contain the sovereign debt crisis.
The FTSEurofirst 300 .FTEU3 rose 0.8 percent to end at 1,076.88.
World stocks as measured by the MSCI .MIWD00000PUS gained 1.3 percent, offsetting Monday’s drop of similar size.
Before Obama’s remarks on the latest budget talks, the U.S. stock market focused on strong earnings, including results of International Business Machines (IBM.N) and Coca-Cola (KO.N), and data showing housing starts in June hit a six-month high.
The Dow Jones industrial average .DJI closed up 202.26 points, or 1.63 percent, at 12,587.42. The Standard & Poor's 500 Index .SPX was up 21.29 points, or 1.63 percent, at 1,326.73. The Nasdaq Composite Index .IXIC was up 61.41 points, or 2.22 percent, at 2,826.52.
Dow component IBM rose 5.7 percent to $185.21 after it reported stronger-than-expected growth in its services division late on Monday, raising hopes for the technology sector.
On the Nasdaq, shares of Apple (AAPL.O) hit a 52-week high at $378.65 ahead of its earnings, due after the closing bell.
Not all of Tuesday’s results were encouraging. Wall Street firm Goldman Sachs (GS.N) said its quarterly earnings fell far short of expectations, while Bank of America (BAC.N), the biggest U.S. bank, posted a record quarterly loss.
Under growing pressure to avert a government default, U.S. President Obama threw his support on Tuesday behind efforts by a bipartisan group of senators to negotiate a new deficit-reduction plan.
Investors for the most part appear to be assuming that the U.S. debt ceiling will be lifted before the August 2 deadline and a default averted, with the 10-year Treasury yield hovering just below 3.0 percent.
Even as bank shares rose in Europe, there were concerns that the gains might not be sustained.
“We’re not in a banking crisis, we’re in a political crisis,” said Robert Quinn, chief European strategist at Standard & Poor’s equity research, adding that he was bearish heading into Thursday’s meeting. He said he saw the potential for further banking sector losses.
Gold continued to attract safe-haven investment flows, although it retreated below $1,600 an ounce after touching an all-time high near $1,610.
The euro rose as high as $1.42172 on electronic trading platform EBS before retreating to $1.4141, still up 0.2 percent on the day.
“But an agreement on Thursday could include some form of Greek default, which to me is not necessarily a positive outcome for the euro,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
In the precious metals market, spot gold hovered at $1,600 an ounce after reaching an all-time peak of $1,609.51 earlier. The metal is up 13 percent so far this year. <GOL/>
In the energy futures markets, Brent crude settled up $1.01 at $117.06 a barrel, while U.S. crude for August delivery gained $1.57 to settle at $97.50.
Additional reporting by Steven C. Johnson, Aleksandra Michalska, Karen Brettel, Chris Kelly and Selam Gebrekidan; Editing by Jan Paschal and Dan Grebler