'Santa rally' hopes lifted after Spanish bond auction success

US stocks climbed overnight on upbeat economic data and a successful Spanish bond auction, lifting investor hopes of the fabled year-end 'Santa Claus rally'.

The Dow Jones Industrial Average gained 337 points, or almost 3%, to close at 12,103 on Tuesday. The blue-chip Dow had dropped 100 points on Monday to close at the lowest level of the month.

US housing starts and permits for future builds reached an 18-month high in November, while unemployment dropped off in no fewer than 43 US states.

Elsewhere, Spain sold £4.71bn worth of three- and six-month bonds yesterday, smashing its £3.76bn target. Last week, Spain sold nearly double the amount of longer-term bonds than it had targeted.

Yields on Spain's three-month notes plummeted to 1.7% on Tuesday from 5.1% last month. Meanwhile, ten-year bond yields fell below 5% for the first time in two months.

The sell-off and its impact on US stocks lifted hopes of a 'Santa Claus rally', in which big institutional investors use the final days of the year to scoop up bargains.

However, some analysts said recent wild swings meant there was little evidence the rally would develop.

Pimco bond guru Bill Gross warned his 50,000-odd Twitter followers the rally was not likely to extend beyond Tuesday's big gains. "Prepare 4 record cold winter," he advised.

The Spanish sell-off lifted European markets on Monday, as did news of improving consumer confidence in Germany.

London's FTSE closed 1% higher at 5,419 while the German Dax added more than 3% to 5,847.

Sentiment in London may be affected this morning by ratings agency Moody's warning the UK faces "formidable and rising challenges". But it added the UK continues to merit its AAA rating.