The European Central Bank (ECB) on Thursday jacked up its interest rates by a hefty 50 basis points less than 12 hours after Credit Suisse was handed a 50 billion Swiss franc ($53.94 billion) lifeline.
The central bank pressed forward with a 50 basis point hike despite recent turmoil in financial markets. European government bond borrowing costs were higher and gold gained too, although a number of key stress indicators relaxed.
Credit Suisse's shares spent most of the day up around 20 percent after the ECB's counterpart, the Swiss National Bank (SNB), swooped in with support.
Wall Street climbed early on as data showed the number of Americans filing new claims for unemployment benefits fell more than expected last week, pointing to continued labor market strength.
Money markets are still largely pricing in a 25-basis-point rate hike by the Federal Reserve in March. while ECB President Christine Lagarde described its rate rise on Thursday, which took its key rate to 3%, as a "robust decision" to bring inflation back under control.
"The implications for the Fed's meeting next week suggests that the Fed will raise rates 25 basis points based on futures probability, but will make it clear that the stability of the banking system remains strong," said Quincy Krosby, chief global strategist for LPL Financial in Charlottesville, Virginia.
"At this stage, both the ECB and Fed are trying to find a viable balance between price stability and financial stability."
The Dow Jones Industrial Average rose 69.07 points, or 0.22%, to 31,946.11, the S&P 500 . gained 27.52 points, or 0.71%, to 3,919.42 and the Nasdaq Composite gained 126.03 points, or 1.11%, to 11,560.09 at 11:12 a.m. EDT (1512 GMT).
Europe's STOXX 600 rose 0.6%, while Europe's broad FTSEurofirst 300 index rose 0.7% and bank shares there were up 0.8%, not including the surge by Credit Suisse or other Swiss lenders.
The SNB confirmed early on Thursday that it would provide "liquidity" to the lender. Credit Suisse, which said it was taking "decisive action", will borrow up to 50 billion Swiss francs ($53.76 billion).
Europe's banking stocks suffered their steepest one-day drop in more than a year on Wednesday in the wake of Credit Suisse's woes, which also followed the collapse of two US banks last week.
It has demonstrated what happens when major central banks like the U.S. Federal Reserve and the ECB raise interest rates by hundreds of basis points in a short period of time, Stefan Gerlach, chief economist at EFG Bank in Zurich and a former deputy governor at Ireland's central bank, said.
"Whenever you do something that large, you know there is a risk waiting somewhere in the financial system," Gerlach said, speaking before the ECB hike was announced.
Germany's two-year bond yield, which is highly sensitive to ECB rate expectations, was last up 18 basis points (bps) at 2.56% having plunged 54 bps on Wednesday in what had been a market-wide scramble for safety.
The yield on benchmark 10-year Treasury notes rose to 3.3821% compared with its U.S. close of 3.494% on Wednesday. The two-year yield, which rises with traders' expectations of higher Fed fund rates, was up 8.2 basis points at 4.06%.
Overnight, Asian shares had fallen around 1% but it was largely a catch-up move and had none of the frenzy witnessed in Europe the previous day.
(With inputs from Reuters)
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