NEW YORK (Reuters) - The Dow Jones Industrial Average closed at a historic high on Tuesday as major world stock markets rallied after China pledged record government spending to boost growth and data showed the U.S. service sector expanding at its fastest pace in a year.
Crude oil and copper prices also advanced on China's pledge to deliver growth of 7.5 percent this year in the world's second-largest economy.
On Wall Street, the Dow surpassed the highs seen in 2007, before the steepest U.S. recession in decades, breaking the October 9, 2007 closing record of 14,164.53.
The index rose 125.95 points on Tuesday, or 0.89 percent, to close at 14,253.77 points.
"Stocks are close to fair value, but very cheap relative to the bond market and to cash, which is very expensive," said David Kelly, managing director and chief market strategist at JPMorgan Asset Management in New York.
"Central banks have been keeping rates low and that justified higher stock prices. But we weren't seeing that because of these risks. As these risks have diminished, money is going into stocks because it has nowhere else to go. That led to the new high on the Dow Jones Industrial Average today," he said.
After the peak in 2007, stock markets crashed as the U.S. and Europe entered a deep recession. The rebound in U.S. equity markets has been much stronger than in Europe. The United States did not embrace the sharp government austerity measures that have hindered economic growth in Europe, while added liquidity from the Federal Reserve and historically low interest rates have fuelled investor appetites.
"Things that could really have gone wrong, like a blow-up in Europe or a fiscal cliff in the United States, or a crash landing in China, created an extreme disparity between stocks and bonds and cash," Kelly added.
Even as the Dow hit a record high, its euro-zone peer, the blue-chip Euro STOXX 50, still needs to gain more than 70 percent to reach its June 2007 top.
An MSCI gauge of global equities rose 1.1 percent and the FTSEurofirst-300 index of top European shares shot up 1.8 percent.
By the closing bell, the S&P 500 gained 14.59 points, or 0.96 percent, to 1,539.79 and the Nasdaq Composite added 42.1 points, or 1.32 percent, to 3,224.13.
In the oil market, Brent crude broke a five-day losing streak as the North Sea Brent pipeline remained closed for a third day and investors bet on strong Chinese oil demand.
Data showed the U.S. services sector accelerated at its fastest pace in a year in February, further supporting oil. Brent crude oil rose $1.52, or 1.4 percent, to settle at $111.61 per barrel, while U.S. crude oil added 70 cents, or 0.8 percent, to end at $90.82.
Copper prices rose 0.7 percent after top consumer China's pledge to maintain economic growth at 7.5 percent. Three-month copper rose to $7,772 a ton.
Demand for riskier assets has also been supported by unprecedented liquidity injections by the world's major central banks, and investors are seizing on any signs this will continue.
Comments on Monday from the U.S. Federal Reserve's vice chair, Janet Yellen, backing the current aggressive stimulus effort, and a decision by Australia's Reserve Bank to keep interest rates at record lows, were the latest signs that easy monetary policies will remain in place.
The Bank of Japan, the Bank of England and the European Central Bank are all expected either to keep current loose policies in place or add extra stimulus after their policy meetings this week.
The euro rose for a second day against the U.S. dollar while commodity currencies such as the Australian and New Zealand dollars also gained, as risk sentiment improved after the Dow's jump.
"Clearly, the biggest story of the day was the Dow hitting a record high, so that has lifted some of these riskier currencies against the dollar," said Greg Moore, currency strategist, at TD Securities in Toronto.
Prices of U.S. Treasuries fell, with yields on U.S. government debt range-bound as investors looked to central bank meetings and the U.S. payrolls report.
Yields were pressured slightly higher by the U.S. data.
The benchmark 10-year U.S. Treasury note fell 6/32 in price to yield 1.8978 percent, up from 1.8789 percent on Monday.
Spot gold prices edged higher, paring earlier gains as demand for safe havens was sapped by the Dow record.
Gold was last up 0.1 percent at $1,575.36 an ounce, down from a session high of $1,585.91.