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While you were sleeping: Action boosts optimism

Thursday 13th October 2011

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Stocks are up on hopes that Europe is finally ready to move forward on measures to solve the region’s fiscal crisis.

The euro also strengthened, last up 1.3%, as European Commission President Jose Barroso called for a reinforcement of crisis-hit banks, the payout of a sixth loan to Greece and a faster start for a permanent rescue fund to master Europe’s debt woes.

Barroso urged a “coordinated approach” to deliver a “significantly higher capital ratio of highest quality capital” for banks, while offering government funds only as a last resort, according to Bloomberg News.

Slovakian lawmakers have yet to vote on expanding the euro zone’s rescue fund but have reconciled differences.

Europe’s Stoxx 600 Index gained 1.7% on the day. In afternoon trading in New York, the Dow Jones Industrial Average gained 1.37%, the Standard & Poor's 500 Index rose 1.58% and the Nasdaq Composite Index climbed 1.35%.

"Europeans feel very comfortable that a plan has been put in place with respect to their banks and Greece, and the EFSF is going to solve the problem for now," Peter Boockvar, equity strategist at Miller Tabak & Co in New York, told Reuters.

Some investors predict a major rally as a result.

“The market is going to fly,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co. told Bloomberg.

“Sentiment is shifting as uncertainty dissipates amongst investors. Policy makers have taken the right steps to scotch the fear trade, which will improve equity and credit markets. Get ready. This is going to be some rally.”

Not so for U.S. Treasuries, which dropped amid the fresh optimism that Europe’s debt crisis may finally take a turn for the better, pushing 10-year yields 10 basis points higher to 2.25%.

Today’s US$21 billion auction drew tepid demand; the bid-to-cover ratio was the lowest in nearly a year.

“The lack of demand underscored that there is momentum behind the selloff in Treasuries and the move to riskier assets,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, told Bloomberg.

“The hopeful resolution of European credit woes is allowing some of the safety bid to come out of the market.”

Meanwhile, some Federal Reserve officials last month wanted to keep more asset purchases as a potential way to shore up the world’s largest economy on which they weren’t too optimistic.

“A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” the Fed said in minutes of the September 20-21 session, released today.


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