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GLOBAL MARKETS-Euro and stocks rally as ECB hints about action

by on July 26, 2012 8:56 pm GMT
 

Thu Jul 26, 2012 4:56pm EDT

* ECB’s Draghi sends strong signal that ECB will act

* Euro briefly above $1.23, rallies broadly

* Index of global shares up 2 percent

By Rodrigo Campos

NEW YORK, July 26 (Reuters) – The euro and stocks rallied on
Thursday after European Central Bank President Mario Draghi
pledged to do whatever is necessary to protect the euro zone
from collapse.

The comments from Draghi drove Spanish 10-year bond yields
below the 7 percent mark widely viewed as
unsustainable for the government to fund itself. Earlier yields
had brushed 7.5 percent.

Draghi’s pledge appeared to be a message to the bond market,
a key battleground of the euro-zone crisis as markets have
forced Spanish and Italian borrowing costs ever higher.

In explaining his comments, his boldest to date, Draghi said
the high borrowing costs that some countries must pay to fund
their debt was within the ECB’s mandate for action.

“The overarching concern over the last week or so has been
that the euro zone is slowly melting into the Mediterranean,”
said Art Hogan, managing director of Lazard Capital Markets in
New York.

“To have Draghi come out and say, ‘Listen, we are keeping
this together’ … is going to add support to the market that is
otherwise not there.”

Concerns grew this week that Greece could leave the euro
zone and that Spain was close to asking for a bailout, which the
bloc could ill afford.

Speculation had been rising that the ECB, whose policymakers
meet next week, was considering new measures to tackle the euro
zone’s debt crisis.

Investors were, nonetheless, concerned about how long
Draghi’s remarks would sway markets without some follow-up
action.

Hopes that the Federal Reserve will boost efforts to
stimulate the U.S. economy as early as next week, when its
policy-setting committee meets, gave Wall Street further
support. Top Fed officials recently spelled out what measures
they might take to boost growth and hiring.

The Dow Jones industrial average rose 211.88 points,
or 1.67 percent, to 12,887.93 at the close. The S&P 500 Index
gained 22.13 points, or 1.65 percent, to end at 1,360.02.
The Nasdaq Composite added 39.01 points, or 1.37
percent, to close at 2,893.25.

The FTSEurofirst closed up 2.4 percent, its largest
daily gain in a month, and the MSCI world equity index
gained 2.1 percent after falling four sessions
in a row.

The euro briefly edged above $1.23, also aided by data
showing a drop in U.S. pending home sales. Separate data earlier
showed U.S. applications for first-time unemployment insurance
fell last week to nearly a four-year low.

Other U.S. data on Thursday showed new orders for
long-lasting manufactured goods rose in June although a gauge of
business spending plans dropped, pointing to a slowdown in
factory activity.

Economists said the reports did little to change the view
that the economy was stuck in a rough patch, supporting market
expectations of central bank stimulus actions.

“For weeks, we’ve been seeing this tug of war between
central bankers who want to prop things up, and the reality of
the deteriorating economic conditions that are affecting
earnings,” said Peter Boockvar, equity strategist at Miller
Tabak & Co in New York.

The euro was last up 1.02 percent at $1.2280 after
hitting a session high of $1.2329. It touched its lowest in two
years at $1.2040 on Tuesday.

Some analysts said there was little new or of substance in
comments by policymakers and they expected traders to eventually
sell the euro into any rally.

They said the past two days’ gains may have been overdone
and the euro could re-test recent lows.

“The only thing that could change the downtrend in the euro
is if the Fed launched further quantitative easing or some other
additional policy measures. Otherwise, it’s all about what
happens in the euro zone,” said Richard Falkenhall, currency
strategist at SEB in Stockholm.

Prices for safe-haven 10-year German bonds fell, as well as
for U.S. benchmark Treasuries. The 10-year U.S. Treasury note
was down 10/32, with the yield at 1.44 percent.

BOND BUYING REDUX?

Analysts said Draghi’s comments could be a reference to
plans to restart the ECB’s bond-buying scheme, known as the
Securities Markets Programme (SMP), which has not been used for
months but still exists.

European Commission President Jose Manuel Barroso is due to
hold talks with Greek Premier Antonis Samaras in Athens later,
as a group of international lenders try to decide whether to
keep releasing funds from a 130-billion-euro bailout package.

Oil futures pared gains but rose for a third straight day
after Draghi’s comments, with U.S. labor market data providing
further support.

Brent crude for September delivery gained 88 cents
to settle at $105.26 a barrel and U.S. crude for
September delivery rose 42 cents to settle at $89.39 a barrel.

Copper prices rose 0.3 percent, cutting an earlier
gain of more than 1 percent.