Euro, stocks recover on EU deal

Fri, Jun 29, 2012, 01:00

The euro recovered nearly 2.0 per cent and stocks on major bourses jumped today after euro zone leaders agreed on measures to cut soaring regional borrowing costs in Italy and Spain, in addition to directly recapitalising regional banks.

Spanish and Italian government bond yields fell sharply while safe-haven US and German government debt sold off after it was agreed that EU bailout funds could be used to stabilise bond markets without forcing countries that comply with European Union budget rules to adopt new austerity measures or economic reforms.

They also agreed that, once a single supervisory body for euro zone banks has been created, the funds could be lent directly to banks for recapitalisation without penalising existing debt holders.

Irish bonds rallied, with yields falling across the board. The two-year paper saw its yield fall to 5.094 per cent, down 0.85 per cent from the open. Five year yields were 0.831 per cent lower at 5.5 per cent. Longer term bonds, the nine-year and 15 year, fell by around 0.64 per cent each, to 6.466 per cent and 6.396 per cent respectively.

Yields on Italian 10-year debt fell 5.878 per cent from 6.192 per cent the night before, while yields on the Spanish equivalent fell to 6.514 per cent, down from the close of 6.915 per cent yesterday.

Oil prices rallied along with other commodities as the moves caught markets by surprise. Investor expectations for meaningful steps to tackle the debt crisis had all but disappeared in the run-up to the EU summit, which ends later today.

"We've gotten used to being underwhelmed by the outcomes, so with little to no expectations for success, the fact that it appears we are going to get something substantial is a real important positive for the market in the near term," said Art Hogan, managing director of Lazard Capital Markets in New York.

"It's inching closer to a banking union and the closer we get to a banking union would put (the EU) well on the road to a fiscal union."

The euro surged against the US dollar to trade about 2.0 per cent higher, climbing as high as $1.2692 on Reuters data, the strongest since June 21st. It was last at $1.2678.

Wall Street stocks opened sharply higher after share prices in Europe jumped 2.0 per cent or more, spurred soaring bank shares.

The Dow Jones industrial average was up 1.36 per cent at 12,773.64. The Standard & Poor's 500 Index was up 1.54 per cent at 1,349.50. The Nasdaq Composite Index was up 1.74 per cent at 2,899.16.

In Europe, the FTSE Eurofirst 300 index rose 2.3 per cent, with banks up 3.9 per cent. MSCI's all-country world equity index gained 1.7 per cent and its emerging markets index climbed 3.1 per cent.

The price of safe-haven German bonds headed lower - briefly pushing yields above their US equivalents for the first time since early February - while prices for gold, oil and copper all rose.

Yields on 10-year German debt rose to 1.628 per cent, up from a close of 1.511 per cent. Their US counterparts, the benchmark 10-year US Treasury note , was down 23/32 in price to yield 1.66 per cent.