A raft of strong economic data from the US, including faster-than-expected growth in its factory sector and higher construction spending, convinced traders to snap up equities.
The widely regarded Institute of Supply Management (ISM) said factories grew for the 29th month in a row in December. Its purchasing manager’s index (PMI) jumped by 1.2 percentage points to 53.9.
“With little other good news floating around, these figures will help support the appetite for risk,” said ING’s Rob Carnell.
In London, the FTSE 100 marked the first day of trading in 2012 by rising to its highest close in over five weeks, gaining 127.63 points (2.29 per cent).
At 5,699.91 the blue chip index is well above its 200-day moving average of roughly 5,610 points.
Data showing a slower than expected contraction in UK manufacturing for December also helped reassure investors.
In Europe the FTSEurofirst 300 rose 1.6 per cent to hit its highest close since early August, while across the pond the Dow Jones industrial average rose 1.47 per cent to 12,397.
European and American stocks took their cue from Asia, which closed up overnight on the back of similarly positive manufacturing figures. Hong Kong’s Hang Seng ended up 2.4 per cent after China’s official PMI jumped back into growth territory.
This morning Asian equity markets continued the rally, with the Nikkei opening 1.3 per cent higher.
More good news from the US came in the form of official construction spending data, with spending increasing by 1.2 per cent in November, although the gain was partly offset by a downward revision to October’s data.
Nonetheless the figures provided hope that the US could have the resilience to survive global shocks such as the Eurozone debt crisis.
Later this week all eyes will be on Friday’s official payroll data, which could provide a further sign of a strong US recovery.
A quickly recovering economy would provide a boost to the re-election hopes of Barack Obama, who will this morning get a hint as to which Republican he must fight in November.
Last night, voters in Iowa had the opportunity to choose a Republican candidate, with Mitt Romney and Rock Santorum hotly tipped along with the more libertarian Ron Paul.
Meanwhile, oil rose on fears of a confrontation between Tehran and Washington that could cut off oil exports from the region. ICE Brent crude futures climbed 2.45 per cent to a high of $110.35 a barrel.