Pledge by the European Central Bank President to "do whatever it takes" to defend the euro sparked off a sharp rally in the US markets. Investors have been weighed down by fresh European debt concerns recently while Spain’s borrowing costs have crossed the ‘unsustainable level’ of 7%. Mario Draghi’s comments thus boosted sentiment and the Dow enjoyed its fifth 200-plus points gain for the year.
The Dow Jones Industrial Average (:DJI) enjoyed triple-digit gains of 211.88 points or 1.7% to close at 12,887.93. The Standard & Poor 500 (S&P 500) jumped 1.75 and finished yesterday’s trading session at 1,360.02. The tech-laden Nasdaq Composite Index surged 1.4% and ended just over 39 points higher at 2,893.25. The fear-gauge CBOE Volatility Index (:VIX) slumped 9.4% to settle at 17.53. It was a busy day for the Street as consolidated volumes on the New York Stock Exchange, the Nasdaq and American Stock Exchange were 7.44 billion shares, higher than the year-to-date daily average of 6.74 billion shares.
The Dow had its fifth 200 plus points gain for 2012 yesterday, which was also its fourth-largest increase for the year so far. This increase has come right on the heels of the 204-point gain on July 13th. Yesterday’s 211.88 point gain marked this month’s second jump in excess of 200 points. Last month too, the Dow had jumped over 200 points twice and Dow had to wait only until March 13th to register its second gain in excess of 200 points for the year.
Consequently, all of the 30 Dow components but one managed to finish in the green. Cisco Systems, Inc. (NASDAQ:CSCO) was the only Dow component that settled in the red zone yesterday, dropping 0.3%. Among the biggest Dow gainers, American Express Company (NYSE:AXP), The Walt Disney Company (NYSE:DIS), The Home Depot, Inc. (NYSE:HD), The Coca-Cola Company (NYSE:KO), 3M Co (NYSE:MMM) and AT&T Inc. (NYSE:T) jumped 3.1%, 2.9%, 3.6%, 2.4%, 2.1% and 2.8%, respectively.
While these gains enabled the Dow to be close in the green for the week, the S&P 500 and Nasdaq finally managed a positive finish after fourth-consecutive days of decline. These developments were propelled largely by comments from ECB President Mario Draghi who vowed to safeguard the euro. Draghi said: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro". He went on to state that: "To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate," and added “We have to cope with the financial fragmentation, address these issues."
European debt has been a severe headwind for the markets over the past several months. Investors have witnessed Ireland, Greece, Portugal, Spain, Italy succumbing to the debt pressures. The overall economic growth rate in the euro-zone has also looked feeble. According to data released in May there has been ‘zero GDP growth’ in the Eurozone. If Germany’s GDP had not grown by 0.5%, the Eurozone as a whole would have sunk into a recession. While the euro-zone registered ‘zero GDP growth’, Italy, Spain and Portugal contracted 0.8%, 0.3% and 0.1%, respectively.
In such a scenario, investors have been greeted by some positive developments in patches, such as the events of yesterday. Borrowing costs for Spain had been trending up significantly and even crossed the 7% mark, considered to be an ‘unsustainable level’. Mario Draghi’s comments helped ease the spike in borrowing costs, with Spain's 10-year bond yield dropping to 6.94%, down 40 basis points.
Separately, economic data was also on the positive side after data from U.S. Department of Labor noted a decline in initial claims. According to the report: “In the week ending July 21, the advance figure for seasonally adjusted initial claims was 353,000, a decrease of 35,000 from the previous week's revised figure of 388,000”. This compares favorably with consensus estimates that projected initial claims to would clock in at 380, 000.
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