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First Half Ends with a Flourish: Stocks Surge on New Hope for Europe

Aaron Task
Editor in Chief
Daily Ticker

Nineteen looks like a lucky number in Europe. The EU Summit -- the 19th such confab since the debt crisis began -- is resulting in progress on two major issues: long-term fiscal unity and short-term relief for Spain and Italy.

"We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilize markets," the official statement from the EU Summit reads.

Importantly, officials agreed to allow the European Stability Mechanism (ESM) to directly recapitalize banks, rather than having money flow through the sovereigns -- increasing their debt-to-GDP ratios.

The EU also declared that funds received from the ESM would not be senior to existing debt, removing a major concern for bondholders. Yields on Spanish and Italian debt fell sharply in response, providing relief on a critical short-term concern.

The EU asked the Eurogroup to implement these measures by July 9 and set the stage for the European Central Bank to assume the role of banking regulator for the EU by the end of the year.

The EU's goal here is to "break the vicious circle between banks and sovereigns," and the gambit appears to have paid off, at least for the moment.

While skepticism over the EU's ability to resolve the crisis was running high Friday, financial stocks surged in reaction to the EU statement. In recent trading, the Dow (DJI) was up more than 200 points while gold gained nearly 3% and other "risk" assets rallied in tandem.

Assuming the gains hold, Friday's action puts a bullish cap on a remarkable first half of the year, which saw stocks surge in the first quarter then stumble badly from mid-April through early June.

In the accompanying video, I discuss this morning's EU news and review the first half of the year with Greg Zuckerman, senior writer at The Wall Street Journal.

One of the first-half themes we examine is the relative strength of the U.S. This is evident in the surprising strength of Treasuries -- everybody's favorite short to start the year -- and gains in consumer discretionary stocks, like Costco (COST), Wal-Mart (WMT) and Verizon (VZ). Check out a list of stocks hitting 52-week highs and you'll see a lot of domestic-focused names.

In a slowing global economy and with Europe teetering on potential disaster, the U.S. looked like the best house in a bad neighborhood to many global investors in the first half of 2012. A continuation of that trend will depend a lot on the U.S. consumer, which looks to be pulling back judging by the latest news on personal income/spending and the University of Michigan's consumer sentiment survey.