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May 10 (Bloomberg) — Emerging-market stocks surged the most in a year, bonds rallied and currencies strengthened as European leaders unveiled a loan package worth almost $1 trillion to stop the sovereign-debt crisis that threatened to slow global economic growth.
The MSCI Emerging Markets Index rose 4.4 percent to 967.66 at 2:11 p.m. in New York, rallying from a 9.1 percent drop last week, the largest decline since February 2009. Hungary’s BUX Index climbed 11 percent for the biggest gain since October 2008 and the forint strengthened 2.3 percent against the euro, the most in 13 months. Brazil’s real appreciated 3.3 percent against the dollar, and was the best performer among 26 emerging-market currencies, and the Mexican peso jumped 2.7 percent.
Equity indexes in every major emerging market open for trading rose after the 16 euro nations agreed to offer as much as 750 billion euros ($962 billion) to the most-indebted nations and the European Central Bank said it will buy government and private debt. The rally in global developing-nation bonds sent their extra yield over U.S. Treasuries down 33 basis points, the most in 13 months, while the cost to protect against defaults on east European government debt plunged, according to JPMorgan Chase & Co. and CMA DataVision.
“Investors are holding their nerves,” said Jonathan Garner, chief Asian and emerging-market strategist at Morgan Stanley in London. “We still have a robust global economic recovery under way, not just in Asia but in Latin America, Russia and large parts of eastern Europe.”
Earnings Outlook
Companies in the 22-country MSCI gauge lost more than $800 billion of their market value from April 15 through last week as investors speculated spending cuts and tax increases by European governments including Greece will curb profits around the world.
The cost of credit default swaps linked to Polish, Russian and Czech government debt tumbled today, according to CMA DataVision prices.
MSCI’s gauge of east European shares jumped 4.5 percent. The Czech PX advanced 7.5 percent, the most since October 2008, and Poland’s WIG20 Index climbed 5.2 percent for the biggest increase in 14 months. Romania’s BET Index rose 11 percent, the most since March 2002.
Russian exchanges are closed for a holiday. The nation’s benchmark Micex Index is poised to rebound from last week’s 10 percent tumble as a key momentum indicator signals gains for the first time since October 2008, according to Auerbach Grayson & Co. The Micex Index’s 14-day relative strength index, or RSI, sank to 26.2 on May 7, below the threshold of 30 that indicates a rally, according to technical analysts.
Asian Markets Rebound
The Russian Depositary Index of securities traded in London soared 10 percent, the biggest gain in two months. Brazil’s Bovespa index advanced 3.9 percent, the most on a closing basis since October, while Mexico’s IPC index climbed 2.5 percent.
“Markets are recovering on news of the European package,” said Richard Yetsenga, a global currency strategist at HSBC Holdings Plc in Hong Kong. “I would call this a normalization process. But we are not out of the woods yet.”
The MSCI emerging index is still down 7.6 percent from its 2010 high on April 15, while MSCI’s east European index is down 17 percent and the Latin America gauge is 8.3 percent lower.
China’s Shanghai Composite Index briefly entered a bear market today, then rebounded to close with a 0.4 percent gain. India’s Bombay Stock Exchange Sensitive Index advanced 3.4 percent, the most since July 2009, and South Korea’s Kospi Index rallied 1.8 percent for the steepest rally in almost two months.
Won, Zloty
The won strengthened the most in a year, adding 2.1 percent against the dollar. Currency swaps in South Korea showed less hoarding of dollars, the leading currency for global finance and trade. The one-year basis swap, in which two parties exchange floating-interest rates for the dollar and the won, narrowed eight basis points to minus 154 basis points. That compares with minus 99 basis points a month ago, signaling investors are willing to receive reduced won interest payments to obtain dollars.
Poland’s zloty jumped 2.5 percent against the euro, its biggest appreciation since April 2009. The Polish currency is up 8.4 percent during the past 12 months.
To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net ; Patricia Lui at plui4@bloomberg.net .
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May 10 (Bloomberg) — Volkswagen AG, Europe’s largest car maker, said it postponed a 686.3 million-euro ($897 million) sale of bonds backed by Spanish car loans as Europe’s sovereign debt crisis roiled credit markets.
Yield spreads on car loan-backed securities surged to three-month highs last week, according to JPMorgan Chase & Co data, before European governments announced overnight a package of loans worth almost $1 trillion to keep Greece’s fiscal woes from infecting other countries.
“We decided to postpone the deal due to adverse market conditions,” said Stefan Rolf, head of asset-backed securities structuring at Volkswagen Financial Services AG. “Last week the spreads rose to levels above those that make the deal economically attractive for us.”
Volkswagen, based in Wolfsburg, Germany, said April 14 it was selling 622.5 million euros of AAA rated notes and a 63.75 million-euro portion ranked six steps lower at A by Standard & Poor’s. The top-rated portion was marketed with a yield in the low- to mid-100 basis-point area over benchmark rates, three people with knowledge of the deal said last week.
“The measures agreed over the weekend by the EU to bail out Greece help the market,” Rolf said in a telephone interview. “However, the volatility during last week was so high that the market will need some time to recover.”
The notes, to be issued through a special purpose company called Driver Espana One, were the first public offering of securities backed by Spanish collateral since 2007, according to Societe Generale SA data.
To contact the reporter on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net
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May 10 (Bloomberg) — France’s CAC 40 Index rose 327.70, or 9.7 percent, to 3,720.29 in Paris, rebounding from the biggest weekly drop since 2008.
European policy makers unveiled an unprecedented loan package worth almost $1 trillion to contain Europe’s sovereign- debt crisis. The SBF 120 Index rose 9.2 percent.
The following shares rose or fell in Paris. Stock symbols are in parentheses.
BioMerieux (BIM FP) climbed 3.7 percent to 83.30 euros, erasing a 2 percent decline on May 7. The maker of tests for HIV and hepatitis agreed an alliance with GlaxoSmithKline Plc to develop a molecular test for cancer.
BNP Paribas (BNP FP), France’s biggest bank, surged 21 percent to 53.11 euros, the biggest gain on record. Societe Generale SA (GLE FP) jumped 24 percent to 40.60 euros, the biggest gain since the bank started trading.
Jolted into action by last week’s slide in the euro to a 14-month low and soaring bond yields in Portugal and Spain, the 16 euro nations agreed to offer financial assistance worth as much as 750 billion euros ($962 billion) to countries under attack from speculators. The European Central Bank will counter “severe tensions” in “certain” markets by purchasing government and private debt.
Credit Agricole SA (ACA FP) jumped 19 percent to 10.75 euros, the biggest gain since September 2008. France’s largest bank by branches may say first-quarter profit more than doubled on a rebound in earnings at its corporate- and investment- banking unit.
Net income probably rose to 511 million euros ($666 million) from 202 million euros a year earlier, according to the median estimate of 11 analysts surveyed by Bloomberg. The bank will report on May 12 after the Paris stock market closes.
EDF Energies Nouvelles SA (EEN FP) rose 5.5 percent to 33.05 euros, the first advance in five trading sessions. The renewable-energy arm of Electricite de France SA was raised to “buy” from “neutral” at UBS AG.
Euler Hermes SA (ELE FP) rose 3.9 percent to 62.35 euros. The world’s largest insurer of trade credit said first-quarter profit almost tripled to 47.6 million euros from 16.5 million euros a year earlier, helped by lower claims relating to corporate bankruptcies.
Unibail-Rodamco SE (UL FP) increased 7.2 percent to 130.20 euros, ending the longest falling streak since March. Europe’s largest shopping-center owner was raised to “buy” at Royal Bank of Scotland Group Plc.
Veolia Environnement SA (VIE FP) gained 6.8 percent to 23.15 euros, the biggest gain in more than a year. The world’s biggest water utility was raised to “buy” at Natixis, Aurel BGC and AlphaValue SAS.
To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net .
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May 10 (Bloomberg) — China’s stocks have “corrected enough” and investors should consider buying equities as the probability of a hard landing for the economy is “not that high,” according to BofA Merrill Lynch Global Research.
The Chinese government may also be reluctant to tighten monetary policy further on concern the European debt crisis may spread, BofA strategists led by David Cui wrote in a report.
The nation’s equities are Asia’s worst performers this year on the prospect China will step up measures to contain inflation and tame asset bubbles. The Shanghai Composite Index slid 0.5 percent to 2,674.57 as of 10:53 a.m. in Shanghai after losing 6.4 percent last week, its fifth weekly drop. The gauge has slid 18 percent this year while the Hang Seng China Enterprises Index, tracking H shares in Hong Kong has retreated 11 percent.
“The weakness in recent days caught us a little by surprise,” the strategists wrote. “The question for us is whether a hard landing is indeed on the cards. At this stage, although we cannot rule out the possibility, we consider the probability not that high.”
Howard Wang, head of the Greater China team at JF Asset Management, said on May 7 Europe’s debt crisis may force China to reverse its policies. Macquarie Securities Ltd. also predicted that China is likely to reverse policies cracking down on the property market because they will put the nation’s 8 percent economic growth target for this year at risk, according to economist Paul Cavey.
Europe Loan
European policy makers today unveiled an unprecedented loan package worth nearly $1 trillion and a program of securities purchases in a bid to stop a sovereign-debt crisis that has threatened to shatter confidence in the euro.
Governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators after the currency declined to a 14-month low and bond yields in Portugal and Spain soared.
BofA doesn’t expect a “collapse” in China’s property market given the amount of savings, income growth, expectations for inflation and a possible easing in tightening should the market weaken “too much,” according to the report. “Broad” monetary policy remains accommodative even as the government cracks down on property, the strategists said.
The People’s Bank of China has ordered lenders to set aside more deposits as reserves three times in 2010. The government also imposed a ban last month on loans for third-home purchases and raised mortgage rates and down-payment requirements for second home purchases to curb housing prices.
Stocks to Buy
Shougang Concord Technology Holdings Ltd., Zijin Mining Group Co. and Industrial & Commercial Bank of China Ltd. are among stocks rated “buy” by BofA analysts and that are trading at near or below their 200-day lows, according to the report.
Shougang Concord, a maker of electronics components and electrical and telecommunications equipment, has lost 14 percent in Hong Kong trading this year. Zijin, China’s largest producer of gold, has dropped 19 percent while ICBC, as China’s largest lender is known, has retreated 14 percent.
To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net
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May 10 (Bloomberg) — Canadian stocks rose for the first time in six days after European finance ministers agreed to an almost $1 trillion loan package in an attempt to stop the sovereign-debt crisis from further weakening the euro.
Toronto-Dominion Bank, the country’s second-biggest bank, increased 2.3 percent as financial companies jumped. Teck Resources Ltd., the country’s largest base-metals producer, surged 6.9 percent as copper rallied the most in six weeks. Suncor Energy Inc., Canada’s largest oil and gas company, gained 1.6 percent as crude futures advanced the most intraday in seven months.
The Standard & Poor’s/TSX Composite Index climbed 199.39 points, or 1.7 percent, to 11,891.82 at 2:17 p.m. in Toronto. The index rallied as much as 2.8 percent, the most intraday in almost a year.
“There were a lot of people shorting this market,” said Chyanne Fickes, vice president of investments at Stone Asset Management in Toronto, which manages C$810 million ($790 million). “The underlying economic issues in North America appear to be really improving a lot, and the basic shutdown of Europe taken off the table — that is a big concern if you’re short.”
The S&P/TSX dropped 4.2 percent last week, the most since July, after a 110 billion-euro European Union-International Monetary Fund bailout package for Greece failed to stem investors’ concern over budget deficits on the continent.
$1 Trillion Package
The finance chiefs of countries that use the euro agreed to the almost $1 trillion package and a program of bond purchases after a 14-hour meeting overnight. The loans would be funded from European governments, the EU and the IMF.
Bond yields in the most-heavily indebted countries that use the euro currency retreated, indicating investors feel default is less likely. The yield on the benchmark Greek two-year government bond plunged to as little as 5 percent from 18.3 percent May 7. The U.S. dollar sank as much as 1.8 percent, the most in a year, against a basket of world currencies.
Oil futures rose as much as 4.5 percent, the most in seven months, after tumbling 13 percent last week. The futures’ advance later narrowed to 1.4 percent, bringing prices to C$76.15 a barrel in New York, while natural gas climbed 4.8 percent.
An index of energy companies rallied as much as 3.6 percent for the biggest intraday gain in 10 months.
Suncor, Pacific Rubiales
Suncor increased 1.6 percent to C$32.44. Canadian Natural Resources Ltd., the country’s second-largest energy company by market value, climbed 2 percent to C$73.45. Pacific Rubiales Energy Corp., which produces heavy oil in Colombia, soared 9.3 percent, the most since July, to C$21.
S&P/TSX financial stocks rebounded from a two-month low. TD rallied 2.3 percent to C$73.55 to contribute the most to the S&P/TSX’s gain. Royal Bank of Canada, the country’s largest bank, rose 1.4 percent to C$59.76. Manulife Financial Corp., the country’s largest insurer, gained 1.4 percent to C$18.38.
Producers of metals used in industry advanced on the promise of economic recovery. Teck increased 6.9 percent to C$38.86, and earlier today rose as much as 8.5 percent, the most in seven months. First Quantum Minerals Ltd., Canada’s second- largest copper producer, climbed 6.6 percent to C$74.06 after losing 11 percent last week. Consolidated Thompson Iron Mines Ltd. rallied 8.6 percent to C$8.81.
ShawCor Ltd., which provides products and services to the energy industry, fell 5.2 percent, the most among S&P/TSX companies, to C$27.11. The company reported first-quarter earnings that missed the average analyst estimate by 61 percent, excluding certain items.
To contact the reporters on this story: Matt Walcoff in Toronto at mwalcoff1@bloomberg.net
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May 10 (Bloomberg) — A four-year slump in construction may be nearing an end, with the biggest U.S. building-material makers reporting higher monthly sales that have yet to spread industrywide.
Cemex SAB, the largest U.S. cement producer, and Vulcan Materials Co., the top gravel supplier, just reported monthly volume increases for March and April, their first since 2006. The results exceeded estimates and may lead the Portland Cement Association, a trade organization that represents U.S. and Canadian companies, to increase its growth forecast this year, said Ed Sullivan, its chief economist.
“This upturn, even though it’s still based on limited data, is to be believed,” Sullivan said in an interview. “From what I’m hearing, it’s a significant uptick in April and I think we’re going to see a very good May as well.”
Increases in housing starts and rail shipments of crushed rock, sand and gravel indicate a rebound in construction, which shed about 1.9 million jobs in the worst economic recession since the 1930s. Year-over-year housing starts rose for a fourth month to an annual rate of 626,000 in March, the highest since November 2008, the latest Commerce Department figures show.
The turnaround isn’t as clear for companies such as homebuilder Pulte Group Inc. and wallboard maker USG Corp., which continue to lose money, and Sullivan said a recovery will probably be slow.
The cement association forecasts demand will rise 5.2 percent this year after dropping 27 percent last year. Cement demand may rise as much as 7.5 percent to 8 percent as housing rebounds and most stimulus funds for highways and bridges is spent this year, Sullivan said.
Cemex and Vulcan
Cemex said cement sales volumes rose in March and then widened to gains exceeding 10 percent in April. About 19 percent of the Monterrey, Mexico-based company’s sales are in the U.S. Even with the turnaround, the U.S. sales volume was down about 8 percent in the first quarter, hurt by heavy snow and rain in January and February that delayed construction.
Vulcan’s volumes for crushed stone and gravel also rose from a year earlier during March and April, Chief Executive Officer Donald James said during the Birmingham, Alabama-based company’s earnings conference call May 4.
“Confidence is growing that many of our markets have stabilized and that aggregate shipments will improve for the remainder of 2010,” James said.
Cemex last month repeated a January prediction that cement volumes would rise in the “high single digits” in 2010.
‘Early Indicators’
“Early indicators for construction-material demand show the second half of the year will be very good,” Chief Executive Officer Lorenzo Zambrano said at an April 29 news conference.
About 74 percent of the $27 billion in stimulus funds authorized for U.S. roads and bridges hasn’t yet been spent and most of it will come at the end of this year, Cemex said. Congress in March authorized $42 billion for the federal highway program this year, James said.
U.S. construction spending rose 0.2 percent in March to $847.3 billion after dropping 2.1 percent in February, according to the Commerce Department.
Indications of a turnaround in U.S. construction prompted Credit Suisse Group AG analyst Vanessa Quiroga to raise her recommendation today on Cemex to “outperform” from “neutral” and to boost her 12-month target price on Cemex’s U.S. shares to $15 from $10. Credit Suisse expects the U.S. market to account for 70 percent of Cemex’s Ebitda growth over the next four years.
‘Gain Traction’
“We expect the recovery to gain traction in 2011 and beyond, as demand from private construction picks up,” Quiroga said in a report today.
The gains are still uneven, an analyst said. Housing is beginning to stabilize at very low levels while commercial construction continues to decline, John “Jack” Kasprzak of BB&T Capital Markets in Richmond, Virginia, said in a telephone interview. Stimulus spending will boost a weak industry.
Highway plans are less certain after this year because Congress hasn’t agreed on how to replenish a program funded by gasoline taxes, he said.
After the Stimulus
“I don’t think anybody thinks private consumption has improved yet,” Kasprzak said. “The stimulus will wear off and then what do you do?”
Cemex’s U.S. shares rose $1.03, or 10 percent, to $11.28 at 12:29 p.m. in New York Stock Exchange composite trading. Vulcan increased $3.73, or 7.3 percent, to $54.81.
So far this year, Cemex shares have fallen 4.7 percent in New York so far this year, while Vulcan has gained 4 percent. The Standard & Poor’s 500 Index, meanwhile, has gained 3.8 percent.
It may take until 2014 or 2015 to make up for the drop in demand of 54 million metric tons of cement from the peak in 2006, the cement trade group’s Sullivan said. A 5.2 percent increase this year would add back 4 million metric tons, he said.
Demand for gypsum wallboard and home insulation, which can trail housing starts by six months, continues to decline.
Chicago-based USG Corp., the largest U.S. producer of wallboard, said on April 20 that first-quarter shipments fell 12 percent from the year earlier. Owens Corning Inc., the nation’s biggest maker of insulation, expects to keep losing money in that business this year because of weak demand, Chief Executive Officer Mike Thaman told analysts on April 28.
Less Robust
Pulte Group, the biggest U.S. homebuilder by revenue, remains skeptical of a big turnaround in housing this year after posting continuous net losses starting in the fourth quarter of 2006, its CEO said this week.
Pulte’s first-quarter net loss narrowed to $12.5 million from $514.8 million a year earlier, the Bloomfield Hills, Michigan-based company said May 5. “We’ve gotten off to a solid start in a year that may be not be as robust as some had expected,” Pulte CEO Richard Dugas said on a conference call. “The U.S. housing industry is finding, and may have already found, a bottom, but that’s different from saying that a recovery is at hand.”
To contact the reporter on this story: Thomas Black in Monterrey at tblack@bloomberg.net .
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May 10 (Bloomberg) — Greeks wondering how to get out of this nightmare could do worse than look to South Korea.
One of the most moving things I’ve ever witnessed was the gold donations in Seoul in 1998. The “Collect Gold for the Love of Korea” campaign had millions voluntarily turning over the family jewels to the government to help the economy.
Rarely has modern history seen such a powerful grassroots effort to pull out of a crisis. Korea did just that faster than peers in Asia. Its economic growth rate is 7.8 percent.
Korea has its problems, not least of which is the need to raise interest rates to avoid asset bubbles. A handful of huge family-owned conglomerates tower over the economy and stifle entrepreneurship. The nation is too reliant on exports at a time when competing with China is a losing strategy.
The deadly protests in Athens suggest Greece has some lessons to learn from South Korea. Here are three of them.
One, sacrifice is inevitable. OK, so a Korea-like gold drive in Greece is a reach, nor would such a gesture on the part of its 10 million people be enough. Korea was extraordinarily adept at encouraging its population to share the burden of its debt crisis. A similar tighten-your-belt campaign is needed in Greece and elsewhere in the euro area.
Monumental Debt
Europe’s debt woes are too monumental to think a few bailouts will do the trick. Higher taxes are needed, and in Greece’s case, more aggressive tax collection is required. Korea attacked tax dodgers by encouraging consumers to use credit cards for most purchases. Cash transactions were too easy to hide from authorities.
There was a dark side. For a time in the mid-2000s, Korean consumers got in over their heads in debt. There were concerns that the nation’s troubles had merely been shifted from companies to households. The risks were identified early enough, though, and the problem was addressed.
Two, bite the bullet sooner, not later. Even after last week’s 110 billion-euro ($140 billion) bailout, there’s a good chance Greece’s debt woes will still be on an unsustainable trajectory. It will probably have to restructure debt because the strains placed on the economy will be too great. It’s better to get it over and done with.
“If you restructure now, markets won’t spend every moment of the next two or three years wondering when the inevitable will happen,” says Barry Eichengreen, economics professor at the University of California, Berkeley. “Just do it.”
Failed Companies
After South Korea received a $57 billion bailout from the International Monetary Fund, little time was wasted. Weak companies were allowed to fail. Several banks were closed and their employees were fired. The government was transparent about its debts and reduced them.
There’s much griping about how the terms of Greece’s IMF package are far less stringent than those forced on Korea, Indonesia and Thailand. I got an earful about it on a recent trip to Seoul. Eisuke Sakakibara, Japan’s former top currency official, says the institution should change its name to “European Monetary Fund.”
The IMF learned lots from its missteps in Asia. Yet is Europe being well-served by easy bailout terms? Probably not. Nor will it help the IMF’s credibility to become an automated teller machine for Europe’s worst debtors.
Shock Therapy
Greece’s population would clearly disagree. There, opinion polls suggest the nation is now the subject of unprecedented shock therapy. That suggestion engenders giggles among Korean officials, who know a thing or two about radical change. The Confucian ethics of personal and governmental responsibility have served Korea well.
Three, the future could be bright. While easy for us foreigners to say, many Korea observers argue that the economy’s collapse left it better off. It shook things up like nothing else could have, forcing a restructuring of industry and the government’s role in it. Greece needs a similar overhaul.
Make no mistake, Europe’s debt crisis is going global. As investors such as Loomis Sayles & Co.’s Dan Fuss and Pacific Investment Management Co.’s Mohamed El-Erian astutely point out, it’s merely the first wave of worries that governments borrowed too much to revive economies. Markets are now plunging.
To many, Korea is a developing economy, a label that no longer fits in my opinion. Its challenges have far more in common with Japan than China. It still needs to create a more flexible labor market, improve corporate governance and move further up the value chain away from manufacturing. It was hit hard by the chaos in global markets. The stock market plunged 41 percent in 2008.
Korea is getting there, though. Not as fast as some investors would like, but economic change is afoot.
We live in a world devoid of obvious economic role models. The U.S. used to be one. Officials in Asia, Latin America and Africa once looked to the euro as something to aspire to. Not so much anymore.
It’s time to begin looking at less obvious examples. Korea, for all its problems, is as good a place as any to start.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
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May 10 (Bloomberg) — U.S. stocks rallied, with benchmark indexes advancing the most in more than a year, after European policy makers announced a loan package of almost $1 trillion to contain the sovereign-debt crisis.
General Electric Co., Caterpillar Inc. and Bank of America Corp. rose at least 6.8 percent, leading gains in the Dow Jones Industrial Average. Gauges of energy and raw-materials producers in the Standard & Poor’s 500 Index jumped more than 3.9 percent as oil climbed above $76 a barrel and copper rose the most in six weeks.
The Standard & Poor’s 500 Index gained 4.4 percent to 1,159.72 at 4 p.m. in New York. The Dow Jones Industrial Average surged 404.63 points, or 3.9 percent, to 10,785.06. The VIX, the benchmark for U.S. stock options, tumbled 30 percent to 28.7, the biggest drop in its two-decade history.
“This takes the panic out of the market,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion. “We expect investors to hopefully focus on U.S. economic fundamentals, which have been pretty good. Our forecast is for somewhere between 1,250 and 1,300 on the S&P 500 by year-end.”
The S&P 500’s advance followed an 8.7 percent slide since April 23 and the biggest weekly retreat since the start of the bull market in March 2009 as concern grew that European leaders weren’t doing enough to halt a government debt crisis.
$1 Trillion Package
Jolted into action by last week’s drop in the euro to a 14- month low and soaring bond yields in Portugal and Spain, the 16 euro nations agreed to offer financial assistance valued at almost $1 trillion to countries struggling to finance budget deficits. The European Central Bank will counter “severe tensions” in “certain” markets by purchasing government and private debt.
“It’s unequivocally positive for the markets,” said Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co. “There was never really a question of financial resource but of political will. Sovereign solvency and investors increasingly thinking there was a risk of a dissolution of the EU were becoming very real concerns for equities.”
Stocks around the world have been battered this month amid concern European leaders won’t do enough to keep indebted nations from defaulting. Greece may have its credit rating cut to junk within the next four weeks, Moody’s Investors Service said in a report. Greece is already rated junk at S&P.
Unprecedented Loans
Under the unprecedented loan package, euro-area governments pledged 440 billion euros in loans or guarantees, with 60 billion euros more in loans from the European Union’s budget and as much as 250 billion euros from the International Monetary Fund. The European Central Bank said it will conduct “interventions” to ensure “depth and liquidity” in markets.
“The market is anticipating that the fix is the same as the fix in the U.S. and we got a good response in the market, so Europe should get a good response as well,” said Doreen Mogavero, chief executive officer of Mogavero, Lee & Co., who works on the floor of the New York Stock Exchange. “Shorts covered immediately, and people with cash began to chase yield again before the market got away from them because interest rates will continue to stay at historic lows.”
S&P 500 futures earlier rallied as much as 55 points before the open of exchanges in New York, the overnight limit set by the CME Group Inc., the world’s largest futures and options exchange. Today’s gain was the fourth-biggest rally in futures since 1993, according to Birinyi Associates Inc.
‘Relief Rally’
“It’s a relief rally,” said Michael Levine, a money manager at New York-based OppenheimerFunds Inc., which oversees about $165 billion. “Europe seems to be more proactively addressing its debt problems. The selloff is overdone. The valuations and the economic trends in the U.S. support stocks moving higher.”
The Stoxx Europe 600 Index surged 7.2 percent, the biggest rally since November 2008, after European stocks plunged the most in 18 months last week.
Treasuries tumbled on investors’ increased appetite for risk, with yields on benchmark 10-year U.S. notes rising to 3.54 percent.
All 10 industry groups in the S&P 500 rose at least 2.4 percent. GE surged 6.9 percent to $18.04. Caterpillar gained 7.4 percent to $66.68. Bank of America rallied 6.9 percent to $17.30.
To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net
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