World markets look to Europe, hoping for solution to crisis

LONDON -- Hopes that Europe is close to agreeing a package of measures to deal with its debt crisis supported market sentiment Wednesday, though fears of disappointment kept the gains in check.

A report in The Guardian newspaper in London suggested that France and Germany, Europe's two biggest economies, were putting the finishing touches on a massive expansion of the region's bailout fund, the European Financial Stability Facility or EFSF.

The report, which said the two countries were considering raising the EFSF's firepower to 2 trillion euros from 440 billion euros, helped boost stocks in the U.S. and Asia late Tuesday.

The buying momentum carried through to Europe on Wednesday, though Wall Street's rally ran out of steam soon after the open. The German government denied a deal had been reached on boosting the bailout fund.

Amid the conflicting signals, investors remained cautious in the run-up to Sunday's meeting of eurozone leaders in Brussels where a comprehensive solution to the debt crisis has been promised.

"Despite the fact that the market has appeared predisposed to react to good news over the past couple of weeks the potential stumbling blocks over the issues of bank recapitalization and the development of the EFSF are still huge," said Jane Foley, an analyst at Rabobank International. "There is clear risk that this weekend's crucial leaders' meeting will provide disappointment."

In Europe, Germany's DAX was up 0.5 percent at 5,904 while the CAC-40 in France rose 0.2 percent at 3,148. The FTSE 100 index of leading British shares was 0.6 percent higher at 5,441.

Over the past couple of weeks, stocks recovered a chunk of their losses for the year as investors became confident that the 17 countries that use the euro were preparing a three-pronged solution to the debt crisis. That would include measures to boost the firepower of the bailout fund, a recapitalization of a large part of the banking sector and a plan to get the banks to take a bigger hit on their Greek debt holdings.

However, hopes for such a plan were diminished in the early part of the week, after German officials, including the finance minister, cautioned investors against believing that Sunday's summit would mark a definitive turning point in the crisis.

"The market risk remains disappointment with whatever is decided at the weekend summit," said Neil MacKinnon, global macro strategist at VTB Capital.

Investors will be closely monitoring all commentary from key players in the summit, especially if anything emerges later from a telephone call between French president Nicolas Sarkozy and German Chancellor Angela Merkel. A French government spokeswoman said Sarkozy emphasized to cabinet members earlier Wednesday that "Europe has a rendezvous with its history."

While stocks have advanced, the euro has perked up and appears headed back toward the $1.40 mark for the first time in six weeks -- when investors are willing to take on more risk the euro usually rises.

By mid afternoon, it was 0.4 percent higher at $1.3800.

Oil prices have also recovered ground on optimism of a comprehensive solution in Europe but were trading flat on the back of the muted performance in stock markets, particularly in the U.S. The benchmark rate for November delivery was down 8 cents at $88.46 a barrel in electronic trading on the New York Mercantile Exchange.

Earlier in Asia, Japan's Nikkei 225 index rose 0.4 percent to 8,772.54 and Hong Kong's Hang Seng added 1.3 percent to 18,309.22. South Korea's Kospi gained 0.9 percent to 1,855.92.

However, mainland China's Shanghai Composite Index fell 0.3 percent to 2,377.51. That comes on top of a 2.3 percent loss Tuesday, when data showed China's economic growth eased last quarter to 9.1 percent. The smaller Shenzhen Composite Index lost 0.6 percent to 1,004.20.