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GLOBAL MARKETS-Stocks fly on central bank hopes, euro cuts gains

by on July 27, 2012 9:57 pm GMT
 

Fri Jul 27, 2012 5:57pm EDT

* Euro up, but rally fades late

* German, French leaders voice strong support for euro zone

* Oil futures, metals prices also rise

* Italian, Spanish bond yields fall

By Rodrigo Campos

NEW YORK, July 27 (Reuters) – Stocks rallied on Friday 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, U.S. 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 U.S. economy also grew after data showed U.S. gross domestic
product expanded at a 1.5 percent 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 percent, to 13,075.66. The S&P 500 Index gained
25.95 points, or 1.91 percent, to 1,385.97. The Nasdaq Composite
added 64.84 points, or 2.24 percent, to 2,958.09.

The FTSEurofirst 300 advanced 1.3 percent to close
at 1,056.51. An MSCI index of global equities added 1.8
percent to end at 1,250.02.

Copper prices jumped 1.3 percent while Brent
and U.S. 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 U.S. dollar. It was last up 0.3 percent at
$1.2318, after hitting a session high of $1.2389. On Tuesday,
the single currency slid to a two-year low of $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 percent, the lowest since July 17, while the Italian
benchmark bond yield dipped below 6 percent for
the first time in a week.

As investors turned toward relatively riskier assets,
safe-haven investments fell. The benchmark 10-year U.S. Treasury
note slid 29/32, or nearly a full point in price,
while the yield rose to 1.534 percent.