EU-phoria: Markets Buoyed by Greece Bailout
Stocks rose steeply Monday, buoyed by the European Union's $1 trillion plan to defend the embattled 16-country euro currency and prevent a spreading government debt crisis from choking off the global economic recovery.
Stock investors were galvanized back into buying after one of the worst weeks since the height of the financial crisis in the latter part of 2008. The euro shot up to $1.30 after sliding to a 14-month low of $1.2523 on Friday and oil prices rallied following last week's slump.
"Default risk has been quashed and the market reaction has been euphoric," said Jane Foley, research director at Forex.com.
U.S. stock futures skyrocketed after European leaders agreed on plan, and on news that the U.S. Federal Reserve said it would also provide loans overseas.
The euphoria is set to be repeated on Wall Street - Dow futures were up 377 points, or 3.7 percent, to 10,712 while the broader Standard & Poor's 500 futures spiked 48 points, or 4.3 percent, at 1,155.
In Britain, investors put aside any concerns regarding the formation of a new government and sent the FTSE 100 index of leading shares up 248.98 points, or 4.9 percent, higher at 5,372.
And in Germany, uncertainty related to defeat in a regional election for Chancellor Angela Merkel were similarly downplayed - the DAX index spiked 244.81 points, or 4.3 percent, at 5,959.90.
France's CAC-40 was the best-performing major index in Europe, surging 285.08 points, or 8.4 percent, to 3,677.67.
Some of the biggest were recorded on the stock exchanges of the countries that have been in the line of the markets' fire over the last few weeks and months - Athens' main index was up nearly 10 percent at 1,787.04 while Lisbon's PSI 20 spiked 9 percent to 7,222.44.
And crucially, borrowing costs for the debt-laden countries plummeted amid reports that the European Central Bank was buying up bonds - for example, the difference between yields on Greek 10-year bonds and their benchmark German equivalents was at 5.21 percentage points, down around 5 percentage points.
Monday's dramatic moves follow the earlier news that the European Commission will make €60 billion ($75 billion) available for loans and guarantees to indebted European countries.
Beyond that, the eurozone promised backing for another €440 billion ($570 billion), should it be necessary, and the International Monetary Fund would contribute an additional sum of at least half of the EU's total contribution, or €250 billion.
In addition, the European Central Bank announced what many analysts called its "nuclear option" - buying public and private bonds to lower borrowing costs and increase liquidity.
Investors also feared that if Greece didn't get a bailout, the fate of the euro, which is used by 16 countries, could be in trouble. The euro rose Monday against the dollar.
"Europe has unequivocally said, 'We will defend the euro's integrity,'" said Oliver Pursche, executive vice president at Gary Goldberg Financial Services in Suffern, New York.
Meanwhile, the U.S. Federal Reserve reopened its dollar swap operations, in which it offers billions of dollars overseas to boost banks' cash positions in return for foreign currency. Other central banks, including the Bank of Canada, the Bank of England, the ECB, the Bank of Japan and the Swiss National Bank, are also involved in the effort.
"This is 'Shock and Awe, Part II' and in 3-D, with a much bigger budget and a more impressive array of special effects," said Marco Annunziata, chief economist at UniCredit Group in London.
"This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion," he said.
Market sentiment turned sour last week as a €110 billion ($142 billion) loan package for Greece failed to calm investors, who feared Europe's response was too little and too late to keep confidence in the euro from deteriorating and potentially collapsing.
Markets realized that the draconion austerity measures demanded by Greece's bailout are likely to keep the country in recession, if not depression, for years and complicate paying down heavy debt loads. The images of violent protests in Athens and the prospect that such mayhem could spread to other European countries - such as Portugal and Spain, where borrowing costs were rising ominously - and derail the global recovery caused investors to fear the worst.
On Thursday, a combination of fear and technical glitches contributed to a temporary 1,000-point drop in the Dow, a reminder of the fragility of international markets.
Fears of an imminent collapse in the euro have been answered but the currency is not out of the woods yet, analysts say.
"The audacious stabilization fund unveiled has provided a short in the arm for the euro," said Simon Derrick, senior currency strategist at Bank of New York Mellon.
"As awesome a 'shock and awe' display as yesterday's announcement from the EU was, the true cost and just how it plans to pay the bill remains to be seen," he added.
Earlier, Asian investors applauded the EU's moves, even though the debt crisis is a particularly European concern at the moment. Japan's Nikkei 225 stock average ended 1.6 percent higher at 10,530.71 while Hong Kong's Hang Seng index jumped 2.5 percent to 20,426.64.
Benchmark crude for June delivery was up $2.50 to $77.61 a barrel in electronic trading on the New York Mercantile Exchange. The June contract fell $2 to settle at $75.11 on Friday.
As investors jump back into riskier assets like stocks on Monday, U.S. bond prices tumbled. Gold also fell sharply. Both surged late last week as investors sought safe-haven investments.
The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.59 percent from 3.43 percent late Friday.