The MSCI index is up 13.8% for the year but 1.76% off record highs reached in early September.
"It seems that better-than-expected earnings results from big U.S. banks last week encouraged some market participants to start this week by increasing their risk exposure, as they may have become somewhat more optimistic for the rest of the season," said Charalambos Pissouros, head of research at JFD group.
Macroeconomic indicators also offered some relief, with weaker-than-expected growth data from China and U.S. industrial production numbers on Monday fuelling hopes that major central banks will not rush to tighten monetary policy.
Yields on 10-year U.S. Treasury notes were about 3 bps below Monday's high of 1.627% even after rising early Tuesday. German 10-year government bond yields increased 2 basis points but at -0.124% remain below last week's highs.
The U.S. dollar weakened broadly against its rivals to a three-week low.
Traders said a rally in non-dollar currencies was also due to some short position-covering by hedge funds with the dollar's weakness on Tuesday helping relieve concerns of dollar funding shortages in the cross-currency swap markets.
But concerns lurk beneath the surface, as investors price in faster interest rate rises from the Bank of England to curb growing inflationary pressures. After hawkish comments from BoE Governor Andrew Bailey over the weekend, money markets now expect an initial 0.15% hike from the bank as early as next month.
A BoFA monthly fund manager survey also noted that cash levels among investors rose to a 12-month high, signalling growing caution.
"Investors are now very overweight inflation assets (i.e. commodities, banks) relative to history while at the same time very underweight assets that are vulnerable to interest rate hikes (i.e. bonds, EM, utilities)," the investment bank said on Tuesday.
Analysts said a Wall Street rally overnight that saw Apple, Facebook and Microsoft all rising was behind a strong performance in stock markets.
Sterling, the Australian dollar and the New Zealand dollar all hit one-month highs against the greenback in the Asian session, while the euro EUR=EBS hit a two-week high.
Other risk-sensitive currencies including the Norwegian crown, which also benefits when oil prices rises, hit multi-month highs.
Brent crude rose 0.76% to $84.97 a barrel, off Monday's three-year high above $86. U.S. crude gained 1.16% to $83.4 a barrel. Brent crude prices are up by a third in two months.
Gold gained 0.74% on lower yields to $1,778 an ounce but remained within its recent range.
(Editing by Jason Neely and John Stonestreet) ((firstname.lastname@example.org; +44-20-7542-1713; Reuters Messaging: email@example.com))