Stocks in United States and the euro rose on Friday after the leaders of France and Germany hinted at an aid deal to save fellow euro zone member Greece from default and avert another global crisis, but until an accord is reached a layer of anxiety is seen hanging over markets.
Speculation that heavily indebted Greece could receive 120 billion euros before it runs out of cash this summer offered a measure of comfort to investors who were rocked by exceptional market volatility this week.
Worries that a Greek default could threaten other euro zone members were heightened in late trading after Moody's Investors Service said it may cut Italy's credit rating.
"What sparked the market on Friday was some relief from European leaders that they'll do what they can to avoid a credit crisis," said King Lip, investment officer at Baker Avenue Asset Management in San Francisco.
However, risk aversion remains at elevated levels, signaled by a drop in oil prices, a jump in gold and resilience in the Swiss franc, traditionally seen as a safe-haven currency.
The appetite for low-risk government bonds also rose on nagging doubts whether backing from German Chancellor Angela Merkel and French President Nicolas Sarkozy will speed up aid for Greece. Bonds pared initial losses that had been spurred by encouraging remarks on Greece from the French and German leaders and ended flat on the day.
Merkel said on Friday that Germany and France wanted a quick solution to the impasse over a new aid package for Greece, while Sarkozy said "there was no time to lose."
In Greece, Prime Minister George Papandreou appointed a new finance minister, Evangelos Venizelos, in an effort to push through harsh economic reforms. Venizelos said he will seek approval from his euro zone counterparts on Sunday to agree to some changes of a mid-term austerity plan that the parliament is expected to pass.
Despite Moody's ratings review of Italy, the euro finished up 0.7% for the day at USD 1.4306, trimming its weekly decline to 0.2%.
On Wall Street, the Dow Jones industrial average was up 42.84 points, or 0.36%, at 12,004.36. The Standard & Poor's 500 Index was up 3.86 points, or 0.3%, at 1,271.50. Bu the Nasdaq Composite Index was down 7.22 points, or 0.28%, at 2,616.48.
The S&P 500 and Dow snapped six-week losing streaks, although the S&P 500 was almost 7% below a three-year high reached on May 2.
The FTSEurofirst 300 index of top European shares edged up 0.2% to end at 1,086.73. But the pan-European index still ended down for the week, marking a seven-week losing streak in which it has shed 4.8%.
The MSCI world equity index rose 0.4%, rebounding from a three-month low. It was on track to end the week lower and has moved into negative territory for the year.
The outlook for stocks remains precarious, given the signs of an economic slowdown worldwide and persistent worries over Greece and other highly indebted euro zone nations.
Moreover, the expiration in two weeks of the Federal Reserve's $600 billion bond-buying program, known as QE2, has left some investors wondering how risk assets will fare without the liquidity that the program has generated.
The International Monetary Fund downgraded its forecast for U.S. economic growth on Friday and called for Washington and European countries to solve their budget woes. The IMF also said some fast-growing emerging economies might be overheating.
The latest data on consumer sentiment and economic activity signaled the US recovery was wobbly. The Swiss franc, which strengthens with risk aversion, ended steady against the dollar at USD 0.8481 in chopping trading.
The euro rebounded against the franc to 1.2132 francs after touching a record low on Thursday of 1.1946 on electronic trading platform EBS.
"While we still believe that a new Greek package will be forthcoming, we warn of ongoing headline risk from rating agencies, the IMF, euro-zone politicians and the ECB," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.
The 10-year US Treasury note was down 3/32 in price, yielding 2.94%, not far its six-month lows. September U.S. Treasury and German Bund futures fell 6/32 and 26 basis points , respectively, after setting contract highs on Thursday.
Spot gold rose at USD 1,538.89 an ounce to record its biggest one-day gain in three weeks. US July crude futures lost 2%, or USD 1.94, to settle at USD 93.01 a barrel, while August Brent crude in London was down 77 cents at USD 113.25.
