New York: The euro recovered nearly 2.0 per cent and stocks on major bourses jumped on Friday after euro zone leaders agreed on measures to cut soaring regional borrowing costs in Italy and Spain, in addition to directly recapitalising regional banks.
Spanish and Italian government bond yields fell sharply while safe-haven US and German government debt sold off after it was agreed that EU bailout funds could be used to stabilize bond markets without forcing countries that comply with European Union budget rules to adopt new austerity measures or economic reforms.
It was also agreed after 14 hours of intense talks at Thursday's EU leaders summit that a single supervisory body for euro zone banks, housed under the European Central Bank, would be created by year's end - much faster than previously envisaged.
Oil prices rallied along with other commodities as the moves caught markets by surprise. Investor expectations for meaningful steps to tackle the debt crisis had all but disappeared in the run-up to the EU summit, which ends later on Friday.
"We've gotten used to being underwhelmed by the outcomes, so with little to no expectations for success, the fact that it appears we are going to get something substantial is a real important positive for the market in the near term," said Art Hogan, managing director of Lazard Capital Markets in New York.
"It's inching closer to a banking union and the closer we get to a banking union would put (the EU) well on the road to a fiscal union."
The euro surged against the US dollar to trade about 2.0 per cent higher. The euro climbed as high as $1.2692 on Reuters data, the strongest since June 21. It was last at $1.2678.
Wall Street stocks opened sharply higher after share prices in Europe jumped 2.0 per cent or more, spurred soaring bank shares.
The Dow Jones industrial average was up 1.36 per cent at 12,773.64. The Standard & Poor's 500 Index was up 1.54 per cent at 1,349.50. The Nasdaq Composite Index was up 1.74 per cent at 2,899.16.
In Europe, the FTSE Eurofirst 300 index rose 2.3 per cent, with banks up 3.9 per cent. MSCI's all-country world equity index gained 1.7 per cent and its emerging markets index climbed 3.1 per cent.
The price of safe-haven German bonds headed lower - briefly pushing yields above their US equivalents for the first time since early February - while prices for gold, oil and copper all rose.
Yields on 10-year German debt rose to 1.628 per cent, up from a close of 1.511 per cent. Their US counterparts, the benchmark 10-year US Treasury note , was down 23/32 in price to yield 1.66 per cent.
Yields on Italian 10-year debt fell 5.878 per cent from 6.192 per cent the night before, while yields on the Spanish equivalent fell to 6.514 per cent, down from the close of 6.915 per cent on Thursday.
Despite the market euphoria, many remained sceptical.
Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ in London said among lingering questions is whether the firepower available to the rescue funds will be enough to stabilize the 2.5 trillion euro Spanish and Italian bond markets, and how easy it will be to agree on the banking supervisory mechanism.
"Our initial view is this deal is no game-changer."
Andrew Milligan, head of global strategy at Standard Life Investments said that bond yields in many European countries are still too high and the growth rates too low.
"We really didn't see any actions by the authorities last night which are going to have a material impact on either of those," Milligan said.
Oil prices rallied, but were still set for the deepest quarterly loss since 2008.
Brent crude for August was up $3.68 to $95.04 a barrel. US crude was up $3.74 a barrel at $81.43 a barrel, up from an eight-month low hit on Thursday.