July 27, 2012
Mario Draghi at the EU headquarters in Brussels. Photo: AFP
The euro and stocks rallied on Thursday after European Central Bank President Mario Draghi pledged to do whatever is necessary to hold the eurozone together.
His comments drove Spanish 10-year bond yields below the 7 per cent mark, widely viewed as unsustainable for the government to fund itself, after the yield brushed 7.5 per cent earlier.
Draghi's pledge appeared to be a message to the bond market, a key battleground of the eurozone 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 eurozone 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 eurozone 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 eurozone's debt crisis.
Investors were concerned how long Draghi's remarks would sway markets without some follow-up action. Thursday's sharp rise in US 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 US 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 per cent, to 12,845.73. The S&P 500 Index gained 16.30 points, or 1.22 per cent, to 1,354.19. The Nasdaq Composite added 27.43 points, or 0.96 per cent, to 2,881.67. The Dow rose more than 2 per cent earlier.
The FTSEurofirst closed up 2.4 per cent, its largest daily gain in a month, and the MSCI world equity index gained 1.7 per cent after falling four sessions in a row.
The euro briefly edged above $US1.23, also aided by data showing a drop in US pending home sales. Separate data earlier showed US applications for first-time unemployment insurance fell last week to near a four-year low.
Other US 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 per cent at $US1.2284 after hitting a session high of 1.2329. It touched its lowest in two years at $US1.2040 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 US benchmark Treasuries. The 10-year US Treasury note was down 10/32, with the yield at 1.4311 per cent.
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 US labor market data providing further support.
Brent was up 0.4 per cent at $US104.81 a barrel and US crude was up 0.25 per cent at $US89.19 a barrel.
Copper prices rose 0.21 per cent all but erasing an earlier gain of more than 1 per cent.