World stock markets and the euro soar

LONDON—World stock markets and the euro soared Monday as investors cheered the European Union’s $1 trillion (dollar figures U.S.) plan to defend the embattled 16-country currency and keep a spreading debt crisis from damaging the global economic recovery.

After last week suffering some of the biggest losses since the height of the financial crisis in 2008, European markets rebounded decisively. The euro jumped above $1.3071, after wallowing at a 14-month low of $1.2523 on Friday.

Britain’s FTSE 100 index rose 4.1 per cent to 5,350.05, Germany’s DAX gained 3.9 per cent while the CAC-40 in France soared 6.7 per cent.

Wall Street was also expected to jump higher on the open — Dow futures were up 3.5 per cent at 10,694 and Standard & Poor’s futures were 4.6 per cent higher at 1,158.30.

Crucially, borrowing costs for debt-laden countries plummeted. The difference between yields on Greek 10-year bonds and their benchmark German equivalents was at 4.84 percentage points on Monday, down massively from a record 10.25 points last week.

In a three-year plan, the European Commission will make €60 billion ($75 billion) available for loans and guarantees to indebted European countries. The 16-nation 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 analysts called its “nuclear option” — buying public and private bonds to lower borrowing costs and increase liquidity. 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 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.

The fears of an imminent collapse in the euro have now been answered, analysts say.

However, question marks still hover over the future — whether countries will have the ability to carry through with debt-reducing cuts and how far their economic recoveries will be hampered by austerity cuts. Rather than a collapse, eurozone countries may be in for a long, drawn-out era of economic pain.

Furthermore, should markets sense that the bailout is covering up some countries’ failure to act on their debt, more speculative attacks could take place.

“The bond market vigilantes are still hungry, they smell blood,” said David Cohen, an economist with Action Economics in Singapore. “This package is trying to short circuit that process but it could be like the 1997-1998 Asian crisis where countries were attacked one by one.”

In Asia, Japan’s Nikkei 225 stock average rose 1.6 per cent to 10,530.71 and Hong Kong’s Hang Seng index jumped 2.5 per cent to 20,426.64.

The dollar rose to 93.38 yen from 92.37 yen late Friday.

Benchmark crude for June delivery was up $3.04 to $78.15 a barrel in electronic trading on the New York Mercantile Exchange. The June contract fell $2 to settle at $75.11 on Friday.

Markets go wild on European debt worries May 06, 2010 JOHN SPEARS

What was that? For a brief, heart-stopping period, stock markets plunged, currencies went crazy, bonds ran wild and investors ran for cover.

But by the end of the day U.S. stocks had recovered much of their losses, the Toronto Stock Exchange was basically flat losing 32.7 points to close at 11,842.43, and the Canadian dollar, though pummeled, was still intact.

Experts were flustered, but puzzled by the wild action, though they generally pointed to the ongoing Greek debt crisis.

Rumors also circulated that the panicky sell-off had been triggered by a U.S. stock trader mistakenly put in a sell order for 15 billion shares of Procter & Gamble on the New York Stock Exchange, instead of 15 million.

Whether that’s true or not, the stock dived to $40 from $60 within moments just before 2.30 p.m..

The Dow Jones Industrial Index also began a free-fall of about 1,000 points, or 10 per cent, in less than half an hour.

It didn’t stop with stock markets. The U.S. dollar soared, which meant the Euro plunged along with the Canadian dollar.

After rising as high as 97 cents U.S, at one point the Canadian dollar was down almost 4 cents. It finished the day at 95.03 cents U.S.

Pascal Gauthier of TD Economics pointed to the Greek debt crisis as a possible trigger for the turmoil.

Jean-Paul Trichet, who heads the European Central bank, said in Lisbon Thursday that the bank’s governing council had not discussed the possibility of buying government bonds. Many analysts have speculated it might do so, as a means of providing debt-crushed governments with financial support.

“There might have been expectations that the bank might take some measures, though we were of the view that they would not,” Gauthier speculated.

He warned that other days like this could loom ahead.

“On the fiscal side, those economies that were fragile to begin with before the recession like Greece, Italy, Spain are going to be vulnerable, and markets are going to be nervous,” he said.

“This is going to stay with us. This isn’t just a one-day thing.

Camilla Sutton, currency strategist at Scotiabank, said no one was attacking the Canadian dollar. Instead, investors ran for the safety of U.S. investments.

“This story is about the U.S. dollar,” she said. “What we’re seeing is a very strong, strong U.S. dollar, because very quickly people are closing out foreign positions and moving into the deepest capital markets in the world: The U.S. and the U.S. treasury market.”

The Canadian dollar was simply trampled by the rush into the U.S., she said.