Friday, June 29 15:24:43
The euro recovered nearly 2.0 percent and stocks on major bourses jumped today after euro zone leaders agreed on measures to cut soaring regional borrowing costs in Italy and Spain, in addition to directly recapitalising regional banks.
Spanish and Italian government bond yields fell sharply while safe-haven U.S. and German government debt sold off after it was agreed that EU bailout funds could be used to stabilize bond markets without forcing countries that comply with European Union budget rules to adopt new austerity measures or economic reforms.
It was also agreed after 14 hours of intense talks at Thursday's EU leaders summit that a single supervisory body for euro zone banks, housed under the European Central Bank, would be created by year's end - much faster than previously envisaged.
Oil prices rallied along with other commodities as the moves caught markets by surprise. Investor expectations for meaningful steps to tackle the debt crisis had all but disappeared in the run-up to the EU summit, which ends later on Friday.
"We've gotten used to being underwhelmed by the outcomes, so with little to no expectations for success, the fact that it appears we are going to get something substantial is a real important positive for the market in the near term," said Art Hogan, managing director of Lazard Capital Markets in New York.
"It's inching closer to a banking union and the closer we get to a banking union would put (the EU) well on the road to a fiscal union."
The euro surged against the U.S. dollar to trade about 2.0 percent higher. The euro climbed as high as $1.2692 on Reuters data, the strongest since June 21. It was last at $1.2678. Wall Street stocks opened sharply higher after share prices in Europe jumped 2.0 percent or more, spurred soaring bank shares.
The Dow Jones industrial average was up 1.36 percent at 12,773.64. The Standard and Poor's 500 Index was up 1.54 percent at 1,349.50. The Nasdaq Composite Index was up 1.74 percent at 2,899.16.
In Europe, the FTSE Eurofirst 300 index rose 2.3 percent, with banks up 3.9 percent. MSCI's all-country world equity index gained 1.7 percent and its emerging markets index climbed 3.1 percent. The price of safe-haven German bonds headed lower - briefly pushing yields above their U.S. equivalents for the first time since early February - while prices for gold, oil and copper all rose. Yields on 10-year German debt rose to 1.628 percent, up from a close of 1.511 percent. Their U.S. counterparts, the benchmark 10-year U.S. Treasury note , was down 23/32 in price to yield 1.66 percent.
Yields on Italian 10-year debt fell 5.878 percent from 6.192 percent the night before, while yields on the Spanish equivalent fell to 6.514 percent, down from the close of 6.915 percent on Thursday. Despite the market euphoria, many remained sceptical.
Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ in London said among lingering questions is whether the firepower available to the rescue funds will be enough to stabilize the 2.5 trillion euro Spanish and Italian bond markets, and how easy it will be to agree on the banking supervisory mechanism.
"Our initial view is this deal is no game-changer."
Andrew Milligan, head of global strategy at Standard Life Investments said that bond yields in many European countries are still too high and the growth rates too low. (C ) Reuters