Resilience in the manufacturing sector and a surprise drop in German unemployment lifted global stocks and the euro on Tuesday but positive sentiment is seen vulnerable to a daunting schedule of first quarter debt issuance in Europe.
German unemployment fell more than expected in December, by 22,000 from the previous month to a seasonally adjusted 2.888 million, new data showed. The jobless rate edged down to 6.8 per cent from 6.9 per cent in November - a new record low since figures for unified Germany were first published.
"Firms are still willing to keep hiring. But we must brace ourselves for a deterioration on the labour market from the spring," said Commerzbank economist Eckart Tuchtfeld.
Europe's debt crisis still clouds the outlook, with heavy first quarter borrowing to refinance maturing debt expected to push the euro lower and undermine demand for the region's lower-rated sovereign debt.
"The maturing of debt is going to give investors the opportunity to take some of those funds back out of Europe, to repatriate some of those funds to reduce their exposure," said Ian Stannard, currency strategist at Morgan Stanley.
Signs of improved growth in the United States may also cool any speculation about another round of money-printing by the Federal Reserve, improving the outlook for the dollar.
The euro rose about 0.8 per cent against the dollar to around $1.3030, but stayed within striking distance of its 2011 trough of $1.2858 hit last week.
The MSCI world equity index was up over 0.5 per cent.
Recent slight rises in purchasing managers' indexes for China and the euro zone have encouraged risk appetite, especially in commodity markets.
China's official Purchasing Managers' Index rose to 50.3 in December from 49 in November - moving above the 50 mark which separates expansion from contraction.
Data on Tuesday also showed the official Purchasing Managers' Index for non-manufacturing sectors had rebounded strongly in December to 56.0 from 49.7 in November.
British manufacturing also beat expectations in December, showing signs of stabilizing after a two-month decline as orders from China and Germany picked up, data on Tuesday showed.
Investors will closely watch the ISM Manufacturing PMI data in the United States, due at 1500 GMT, for further signs of recovery in the world's biggest economy, with economists in a Reuters survey expecting a reading of 53.2 versus 52.7 in November.
"The data we've seen coming from the U.S. has actually surprised on the upside over the past few weeks and I think that's going to continue," said Morgan Stanley's Mr. Stannard.
The pick-up in the PMIs encouraged European stocks to a fourth consecutive session of gains. The FTSEurofirst 300 index of top European shares was up 0.7 per cent at 1019.38 points after rising as high as 1,022.85, its highest level in more than two months.
The heavily commodity-weighted UK FTSE 100 index was up 1.2 per cent, lifted by strong gains in mining companies Xstrata and Kazakhmys, both up nearly 4 per cent in early trade.
U.S. crude jumped nearly 2.5 per cent to over $110 a barrel, in response to the escalating tensions between Iran and the West.
Military exercises in the Mideast Gulf by Iran and the movement of U.S. naval vessels in the area raised fears of a confrontation between Tehran and Washington that could cut off oil exports from the region.
Spot gold rose as much as 1.4 per cent to $1,586.95 earlier on Tuesday, also helped by investors renewed appetite for riskier assets.