A forecast-busting survey of the U.S. manufacturing sector gave stocks a further boost Tuesday as investors monitored the tense political situation in Egypt.
Though the prospect of more violence on the streets of Cairo is a potential cause for alarm, investors are keeping a close watch on developments elsewhere, particularly the run of major economic indicators that culminates in the U.S. payrolls figures on Friday.
The monthly manufacturing survey from the Institute for Supply Management kicked off the week's top-tier U.S. data with a bang. Its monthly index of activity rose to a near seven year high of 60.8 in January from the previous month's 58.5. The increase was unexpected with the markets positioned for a modest decline to 58. Any reading above 50 indicates expansion.
Perhaps most importantly in the context of Friday's payrolls figure was the fact that the employment component of the survey rose above 60 for the first time since May 2004. The Federal Reserve is not expected to start tightening monetary policy until the U.S. unemployment rate is clearly heading downwards.
"The data is obviously very good for global growth and global risk at least as expressed in equities," said Alan Ruskin, an analyst at Deutsche Bank.
In Europe, the FTSE 100 index of leading British shares closed up 1.6 percent at 5,957.82, while Germany's DAX rose 1.5 percent to 7,184.27. The CAC-40 in France ended 1.7 percent higher at 4,072.62.
In the U.S., the Dow Jones industrial average was up 0.9 percent at 11,996 around midday New York time while the broader Standard & Poor's 500 index rose 1.3 percent to 1,302.
As well as the U.S. data, the markets will be preparing for Thursday's monthly interest rate decision by the European Central Bank. Comments from ECB chief Jean-Claude Trichet will be closely scrutinized to see if he ratchets up his warnings about inflation, which is now running at 2.4 percent in the eurozone -- above the ECB's target of "close to, but below" 2 percent.
The meeting comes amid signs that Europe's debt crisis is coming off the boil, evidenced further by the news that Standard & Poor's upheld its credit rating on Spain.
The debt crisis has not gone away, experts warn, despite an easing in bond market tensions and recent signs that EU policymakers are preparing a more comprehensive response.
Investors are mindful that EU politicians have over the past year been unable to stamp out the debt crisis and will be keeping a close watch on the meeting of EU leaders in Brussels on Feb 4.
Ahead of the bank meeting and the leaders' summit, the euro remains buoyant near three month dollar highs, trading 0.8 percent firmer Tuesday at $1.3797. Earlier it rose to a high of $1.3804, the first time it has breached $1.38 since Nov. 11.
Hovering in the background are the protests in Egypt, with investors clearly concerned about which, if any, country will be the next to face the wrath of its people.
Though Egypt does not produce much oil, it is the guardian of the Suez Canal -- a key route for oil tankers and cargo ships as they steer from the Persian Gulf to the major oil-consuming nations in Europe.
Oil prices have jumped around 8 percent in the last two trading sessions on fears that the chaos in Egypt could disrupt the 2 million barrels of crude per day that pass through the Suez Canal and an adjacent pipeline. So far, the Suez remains open, and shipping has not been interrupted.
Despite modest declines in the price of oil Tuesday, they are still at levels that fuel concerns over cost pressures in the world's major economies. Previous oil shocks in 1973/4 and 1979 have led to recessions.
A barrel of Brent crude oil in London was up 37 cents at $101 a barrel while the New York equivalent was 82 cents a barrel lower at a still elevated $91.36. Both remain near their highest levels for over two years.
Investors are also keeping a close watch on developments in China amid mounting fears that the monetary authorities will soon be raising interest rates again to keep a lid on inflation.
In a speech to mark the Lunar New Year holiday, China's premier Wen Jiabao promised that the government was committed to preventing excessive price rises and reining in the speculators in the booming property market.
"We need to resolutely guard against overly rapid rises in prices, staunchly and unwaveringly do well the work of controlling real estate prices, resolutely travel the road of common prosperity and energetically develop all aspects of social facilities," Wen said, according to the Xinhua News Agency.
Wen's comments came after Asian markets closed.
The Shanghai Composite index inched up 0.3 percent to 2,798.96 while Japan's Nikkei 225 stock average rose 0.4 percent to close at 10,274.50. Hong Kong's Hang Seng index added 0.2 percent to 23,482.95 and South Korea's Kospi rose 0.1 percent to 2,072.03.
Pamela Sampson in Bangkok contributed to this report.