While you were sleeping Draghi boosts stocks, euro

Friday 27th July 2012

European Central Bank president Mario Draghi secured approval on both sides of the Atlantic with his promise that the central bank will do whatever needed to save the euro.

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro," Draghi said during a speech in London today. "And believe me, it will be enough."

His comments were certainly enough to lift the battered single currency. The euro was last 1 percent stronger at US$1.2283.

"Draghi's comments were a surprise, as was their forcefulness," Andrew Busch, a global currency strategist at Bank of Montreal in Chicago, told Bloomberg News. "It appears that the ECB is willing to take additional steps to ease the funding problems of its members. We may be able to get three to four days of stabilisation for the euro out of it."

Equity markets also drew heart from the ECB chief's comments.

Europe's Stoxx 600 Index closed with a 2.5 percent gain for the session. National benchmark stock indexes rose in the UK, Germany and France as did those in Spain and Italy, with the IBEX 35 climbing 6.1 percent and the FTSE MIB jumping 5.6 percent.

Yields on Spanish and Italian bonds fell as Draghi's comments were interpreted as a sign the ECB was preparing to buy the bonds of the two countries to prevent their borrowing costs from rising too high.

Spain's two-year note yield fell 76 basis points to 5.66 percent, while Italy's two-year yield declined 88 basis points to 4.06 percent, according to Bloomberg.

"To the extent that the size of the sovereign premia [borrowing costs] hamper the functioning of the monetary policy transmission channels, they come within our mandate," he said.

Wall Street chose to focus on the ECB's commitment too. In late afternoon trading in New York, the Dow Jones Industrial Average climbed 1.57 percent, the Standard & Poor's 500 Index rose 1.40 percent, while the Nasdaq Composite Index increased 1.04 percent.

There was some good earnings news. Shares in Sprint Nextel soared more than 19 percent, while those of 3M were last up 2 percent.

Of the 260 companies in the S&P 500 that have reported quarterly results to date, 66.5 percent have posted earnings above analyst expectations, according to Thomson Reuters data.

There were disappointments too. Shares of Zynga plunged to a record low after the biggest developer of games played on Facebook cut its profit outlook. Shares of Facebook, scheduled to report after the market close, tumbled more than 6 percent.

It was also a mixed bag on the economic front.

Separate reports today showed that the US economy continues to struggle to find forward momentum.

The number of Americans filing new claims for jobless benefits fell more than expected last week, while new orders for long-lasting US manufactured goods rose in June. A gauge of planned business spending plans dropped, while contracts to buy previously owned US homes unexpectedly fell last month.

BusinessDesk.co.nz

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