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GLOBAL MARKETS-Euro jumps, shares follow as ECB hints action

by on July 26, 2012 4:53 pm BST
 

Thu Jul 26, 2012 12:53pm EDT

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

* Euro briefly above $1.23, rallies broadly

* European shares up more than 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 hold the euro zone
together.

His comments drove Spanish 10-year bond yields
below the 7 percent mark, widely viewed as unsustainable for the
government to fund itself, after the yield brushed 7.5 percent
earlier.

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 its own rescue,
which the bloc could ill afford.

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

Investors were concerned how long Draghi’s remarks would
sway markets without some follow-up action. Thursday’s sharp
rise in U.S. stocks was already cut by about half by midday.

“Remember, though, that the ECB can’t do this alone;
(Draghi) is going to have to have support from Germany and we’ll
see if that’s forthcoming,” said Lazard’s Hogan.

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 further support to Wall
Street. Top Fed officials recently spelled out what measures
they might take to boost growth and hiring.

The Dow Jones industrial average rose 169.68 points,
or 1.34 percent, to 12,845.73. The S&P 500 Index gained
16.30 points, or 1.22 percent, to 1,354.19. The Nasdaq Composite
added 27.43 points, or 0.96 percent, to 2,881.67. The
Dow rose more than 2 percent earlier.

The FTSEurofirst closed up 2.4 percent, its largest
daily gain in a month, and the MSCI world equity index
gained 1.7 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 near 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
planned 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, which feeds into
market expectations of central bank supportive action.

The euro was last up 1.05 percent at $1.2284 after
hitting a session high of 1.2329. It touched its lowest in two
years at $1.2040 on Tuesday.

“In a heavily biased market, it only takes a little bit of
news of the opposite sentiment to provoke quick moves,” said
Christopher Vecchio, currency analyst at DailyFX in reference to
Draghi’s comments.

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 1.4311 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 were up for a third straight day
after Draghi’s comments, with U.S. labor market data providing
further support.

Brent was up 0.4 percent at $104.81 a barrel and
U.S. crude was up 0.25 percent at $89.19 a barrel.

Copper prices rose 0.21 percent all but erasing an
earlier gain of more than 1 percent.