Global stocks fly on central bank hopes, euro cuts gains
NEW YORK, July 28 — Stocks rallied yesterday on expectations the European Central Bank will tackle high borrowing costs hitting Spain and Italy, but the euro pared gains on market uncertainty about the specific action to be taken.
The benchmark S&P 500 closed at its highest since early May, climbing further after Bloomberg News said ECB President Mario Draghi will meet with Bundesbank President Jens Weidmann to discuss several measures, including bond purchases, to help the euro zone.
The French and German governments said they are "determined to do everything to protect the euro zone" and its single currency. The joint statement echoed similar remarks by Draghi on Thursday, but in comments on Friday, Germany's Bundesbank pushed back against Draghi's pledge.
Adding to hopes for decisive action, US Treasury Secretary Timothy Geithner will meet separately with his German counterpart and Draghi on Monday, the Treasury Department said.
The heightened expectations about ECB intervention soon helped to push Spanish and Italian bond yields lower.
"Fundamentally, there is a lot of uncertainty, and still a lot of unanswered questions as to how exactly the ECB plans to bring down sovereign borrowing costs," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
"To some extent, the rally in the euro and more broadly equities and risk assets had gotten a little bit ahead of itself."
Expectations that the Federal Reserve will act to support the US economy also grew after data showed US gross domestic product expanded at a 1.5 per cent annual rate from April through June, roughly in line with lowered expectations.
Market expectations are high for another round of asset purchases from the Fed, which in the past have sparked rallies in stocks and commodities. Markets are also beginning to price in a move from the ECB, possibly in the form of bond purchases. Both central banks hold separate meetings next week.
The Dow Jones industrial average rose 187.73 points, or 1.46 per cent, to 13,075.66. The S&P 500 Index gained 25.95 points, or 1.91 per cent, to 1,385.97. The Nasdaq Composite added 64.84 points, or 2.24 per cent, to 2,958.09.
The FTSEurofirst 300 advanced 1.3 per cent to close at 1,056.51. An MSCI index of global equities added 1.8 per cent to end at 1,250.02.
Copper prices jumped 1.3 per cent while Brent and US oil prices rose for a fourth day running, although they were both still lower for the week after plummeting on Monday.
The euro pared most of its gains after hitting a three-week high versus the US dollar. It was last up 0.3 per cent at US$1.2318, after hitting a session high of US$1.2389. On Tuesday, the single currency slid to a two-year low of US$1.2040.
In his statement on Thursday, Draghi appeared to target the bond market, saying the monitoring of rising borrowing costs in bloc members was within the ECB's mandate.
Ten-year Spanish bond yields hit a low of 6.731 per cent, the lowest since July 17, while the Italian benchmark bond yield dipped below 6 per cent for the first time in a week.
As investors turned toward relatively riskier assets, safe-haven investments fell. The benchmark 10-year US Treasury note slid 29/32, or nearly a full point in price, while the yield rose to 1.534 per cent. — Reuters
