By Ryan Vlastelica
NEW YORK (Reuters) - Stock markets around the world rallied on Tuesday, rebounding from recent weakness on investor hopes for new economic stimulus measures from the European Central Bank and on strong early readings on the U.S. earnings season.
Despite the gains in equities, oil prices continued to slide, with Brent crude sinking 3.5 percent. U.S. crude futures lost 1.2 percent, extending their drop of 4.7 percent on Monday. If oil closes down on the week, that would mark its eighth straight weekly drop.
Policymakers fear cheap oil due to a supply glut could put key economies into a deflationary tailspin, raising expectations that the ECB could launch a large-scale program of government bond-buying soon, possibly at its Jan. 22 policy meeting.
"It's no secret that Europe is slowing down and that more stimulus is necessary. I'd say the odds of our getting more are very good, above 90 percent, but there's still a lot of uncertainty about what form it will take, and whether the ECB will be able to act in January," said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.
The pan-European FTSEurofirst 300 index jumped 1.3 percent after opening lower. The MSCI International ACWI Price Index added 0.9 percent.
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The Dow Jones industrial average rose 219.63 points, or 1.24 percent, to 17,860.47, the S&P 500 gained 21.68 points, or 1.07 percent, to 2,049.94 and the Nasdaq Composite added 71.94 points, or 1.54 percent, to 4,736.65.
Equities have been volatile of late, with the S&P 500 posting numerous moves of more than 1 percent. "That makes it hard to read too much into today's move and evaluate if it is sustainable," O'Rourke said.
The weakness in oil prices, which have plunged almost 60 percent since June, has been a major contributor to both market volatility and market weakness. The S&P 500 is coming off a two-week decline.
Alcoa Inc late Monday reported fourth-quarter earnings that beat expectations, though shares fell 1.7 percent on Tuesday to $15.90. The aluminum maker is no longer a Dow component but as one of the first major names to report it is seen as informally setting the tone for the earnings season.
The U.S. dollar index rose 0.3 percent against a basket of currencies, and gained 0.3 percent against the euro at $1.1794. It rose 0.1 percent against the yen.
Euro zone government bond yields fell on the prospect of looser ECB policy and a slew of euro zone countries sold debt in a bid to lock in ultra-low borrowing costs. The benchmark 10-year U.S. Treasury note traded down 4/32 in price to yield 1.9275 percent.
Copper prices sank 2.8 percent, on track for their fifth straight daily decline and their biggest one-day drop since November despite strong trade data from China and signs of physical demand. Gold rose 0.5 percent while silver added 4 percent.
(Editing by Meredith Mazzilli and James Dalgleish)