Stock markets around the world rose and the euro held firm on Wednesday on hopes that European policymakers would contain the financial crisis in Cyprus after MPs there voted down an unpopular rescue plan that would see a levy of about 10% on all savings accounts.
Investors also turned their attention to the outcome of the U.S. Federal Reserve's policy meeting that ends later on Wednesday, though few major changes in policy are expected.
Efforts to rescue Cyprus were thrown into disarray on Tuesday when its lawmakers rejected the conditions for a 10 bln euro European Union bailout. But markets have calmed as investors expect an alternative solution to emerge.
"Concerns have faded, and it doesn't seem like we'll see much headline risk from Cyprus as the European Central Bank continues to work toward a solution," said Mark Martiak, senior wealth strategist at Premier/First Allied Securities in New York.
U.S. and European stocks were on track to snap a three-day streak of losses, though European shares were off session highs after a spokesman for the Cyprus government denied media reports of a deal to sell nationalised Cyprus Popular Bank to Russian investors.
Europe's broad FTSEurofirst 300 index closed 0.4% higher while MSCI's world equity index rose 0.4%. The euro bounced off four-month lows to $1.2947 and the U.S. dollar index dipped 0.3%.
The Dow Jones industrial average was up 55.57 points, or 0.38%, at 14,511.39. The Standard & Poor's 500 Index was up 8.80 points, or 0.57%, at 1,557.14. The Nasdaq Composite Index was up 18.95 points, or 0.59%, at 3,248.04.
Earlier in Asia, Hong Kong stocks bounced off a three-month low thanks to a rally in Chinese shares, but MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.1% as other regional markets worried about Cyprus. Japanese markets were closed for a holiday.
Investors were looking ahead to a statement from the Federal Reserve's policy committee and a news conference by Fed Chairman Ben Bernanke later in the day.
Markets expect the Fed to maintain its $85 bln monthly bond-buying stimulus effort despite recent improvements in U.S. economic data. But they will monitor Bernanke's comments for signals on how long the policy will continue.
Concerns about Cyprus were clearly evident at an auction of German government bonds, seen as a European safe haven. The sale of 3.36 bln euros in new 10-year securities drew strong demand and sold at an average yield of 1.36%, the lowest auction price since July last year.
Still, German government bonds ticked lower, with the Bund future down 0.3% at 144.18. In the U.S. bond market, the benchmark 10-year Treasury note was down 10/32 in price with the yield at 1.939%.
Bond investors were looking to comments by the ECB, which has said it will provide liquidity to Cypriot banks within certain limits, even though if there was no bailout, the bank would have to end emergency lending assistance under its current rules.
Cypriot leaders were holding crisis talks in Nicosia on Wednesday to try to avert a financial meltdown after Tuesday's overwhelming rejection of the terms of the EU bailout, which also included hiking the competitive 10% corporate tax rate to 12.5%.
The country was trying to get help from Russia, given the high level of Russian deposits in Cypriot banks, but failed to agree on any loan deal at a first round of talks.
Oil prices joined in the general recovery, with Brent crude rising 0.6% to $108.04 per barrel, while U.S. crude futures added 0.3% to $92.47.
"Clearly, market players anticipate that an alternative solution will be found for Cyprus," said Carsten Fritsch, analyst at Commerzbank. "Nonetheless, the uncertainty surrounding this issue is likely to continue to keep oil prices in check in the short run."
